e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
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For the quarterly period ended
June 30, 2008
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
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For the transition period
from
to
Commission File Number: 000-53330
Federal Home Loan Mortgage
Corporation
(Exact name of registrant as
specified in its charter)
Freddie Mac
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Federally chartered corporation
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52-0904874
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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8200 Jones Branch Drive, McLean, Virginia
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22102-3110
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(Address of principal executive
offices)
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(Zip Code)
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(703) 903-2000
(Registrants telephone
number, including area code)
Indicate by check mark whether the
registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. o Yes x No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
accelerated filer, large accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer (Do not check if a smaller
reporting
company) x
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Smaller
reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). o Yes x No
As of July 28, 2008, there were 647,015,161 shares of
the registrants common stock outstanding.
TABLE OF
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FINANCIAL
STATEMENTS
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PART
I FINANCIAL INFORMATION
This Quarterly Report on
Form 10-Q
includes forward-looking statements, which may include
expectations and objectives related to our operating results,
financial condition, business, capital management, remediation
of significant deficiencies in internal controls, credit losses,
market share and trends and other matters. You should not rely
unduly on our forward-looking statements. Actual results might
differ significantly from those described in or implied by such
forward-looking statements due to various factors and
uncertainties, including those described in
(i) MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, or
MD&A, FORWARD-LOOKING STATEMENTS and RISK
FACTORS in this
Form 10-Q
and in the comparably captioned sections of our Form 10
Registration Statement filed and declared effective by the
Securities and Exchange Commission, or SEC, on July 18,
2008, or Registration Statement, and (ii) the
BUSINESS section of our Registration Statement.
These forward-looking statements are made as of the date of this
Form 10-Q
and we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date of
this
Form 10-Q,
or to reflect the occurrence of unanticipated events.
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE
SUMMARY
Freddie Mac is a stockholder-owned company chartered by Congress
in 1970 to stabilize the nations residential mortgage
markets and expand opportunities for homeownership and
affordable rental housing. Our mission is to provide liquidity,
stability and affordability to the U.S. housing market. We
fulfill our mission by purchasing residential mortgage loans and
mortgage-related securities in the secondary mortgage market. We
are one of the largest purchasers of mortgage loans in the
U.S. We purchase mortgage loans and bundle them into
mortgage-related securities that can be sold to investors. We
can use the proceeds to purchase additional mortgage loans from
primary market mortgage lenders, providing these lenders with a
continuous flow of funds. We also purchase mortgage loans and
mortgage-related securities for our retained portfolio. We
finance our purchases for our retained portfolio and manage
associated interest-rate and other market risks primarily by
issuing a variety of debt instruments and entering into
derivative contracts in the capital markets. See
CONSOLIDATED BALANCE SHEETS ANALYSIS Retained
Portfolio and OUR PORTFOLIOS for a description
and composition of our portfolios.
Though we are chartered by Congress, our business is funded
completely with private capital. We alone are responsible for
making payments on our securities. Neither the
U.S. government nor any other agency or instrumentality of
the U.S. government is obligated to fund our mortgage
purchase or financing activities or to guarantee our securities
or other obligations. Although the U.S. governments
ability to provide financial support to us has recently
increased, this has not changed our responsibility to fund our
obligations or resulted in any guarantee of our securities or
other obligations. See Legislative and Regulatory
Matters.
Recent
Events
Since mid-June 2008, there has been a substantial decline in the
market price of our common stock. The market conditions that
have contributed to this price decline are likely to affect our
approach to raising new core capital including the timing,
amount, type and mix of securities we may issue. We have
committed to the Office of Federal Housing Enterprise Oversight,
or OFHEO, to raise $5.5 billion of new capital. We remain
committed to raising this capital given appropriate market
conditions and will evaluate raising capital beyond this amount
depending on our needs and as market conditions mandate.
Our financial performance for the second quarter, while
reflecting the challenges that face the industry, leaves us
capitalized at a level greater than the 20% mandatory target
capital surplus established by OFHEO and with a greater surplus
above the statutory minimum capital requirement. Given the
challenges facing the industry, we expect to take actions to
maintain our capital position above the mandatory target capital
surplus. Accordingly, subject to approval by our board of
directors, we currently expect to reduce the dividend on our
common stock in the third quarter of 2008 from $0.25 to $0.05 or
less per share and to pay the full dividends at contractual
rates on our preferred stock. In addition, we continue to review
and consider other alternatives for managing our capital
including issuing equity in amounts that could be substantial
and materially dilutive to our existing shareholders, reducing
or rebalancing risk, slowing purchases into our credit guarantee
portfolio and limiting the growth or reducing the size of our
retained portfolio by allowing the portfolio to run off
and/or by
selling securities classified as trading or carried at fair
value under Statement of Financial Accounting Standards, or
SFAS, No. 159 The Fair Value Option for
Financial Assets and Financial Liabilities, Including an
Amendment of FASB Statement No. 115, or
SFAS 159, or
available-for-sale
securities that are accretive to capital (i.e., fair
value exceeds amortized cost). We have retained and are working
with financial advisors and we continue to engage in discussions
with OFHEO and the U.S. Department of the Treasury, or Treasury,
on these matters.
Our liquidity position remains strong as a result of:
(a) our continued access to the debt markets at attractive
spreads, (b) our cash and investments portfolio of
approximately $70 billion and (c) an unencumbered
agency mortgage-related securities portfolio of approximately
$470 billion, which could serve as collateral for
additional borrowings. Under stressful market conditions,
counterparties willing to provide funding based on our
unencumbered portfolio may be unavailable or may offer terms
that are not attractive to the company. On July 13, 2008,
the Board of Governors of the Federal Reserve System, or the
Federal Reserve, granted the Federal Reserve Bank of New York
the authority to lend to Freddie Mac if necessary. Any such
lending would be at the discount rate charged for primary
credit, or the primary credit rate, and collateralized by U.S.
government and federal agency securities. This authorization was
intended to supplement the Treasurys existing authority to
purchase obligations of Freddie Mac.
The Housing and Economic Recovery Act of 2008 was signed into
law on July 30, 2008. Division A of this legislation, the
Federal Housing Finance Regulatory Reform Act of 2008, or the
Regulatory Reform Act, establishes a new regulator for us, the
Federal Housing Finance Agency, or FHFA, with enhanced
regulatory authorities relating, among other things, to our
minimum and risk-based capital levels and our business
activities, including portfolio investments, new products,
management and operations standards, affordable housing goals,
and executive compensation. The Regulatory Reform Act expands
the circumstances under which we could be placed into
conservatorship and also authorizes the FHFA to place us into
receivership under specified circumstances. The Regulatory
Reform Act also requires us to allocate or transfer certain
amounts to: (a) the Secretary of the U.S. Department of
Housing and Urban Development, or HUD, to fund a Housing Trust
Fund and (b) a Capital Magnet Fund administered by the
Secretary of the Treasury. In addition, the Regulatory Reform
Act provides the Secretary of the Treasury with temporary
authority, until December 31, 2009, to purchase any
obligations and other securities we issue under certain
circumstances. See Legislative and Regulatory
Matters for additional information concerning the
provisions of the Regulatory Reform Act and their potential
impact on us.
Market
Overview
In the first six months of 2008, the single-family residential
mortgage market has continued to experience deterioration that
began during 2007. The various factors contributing to this
deterioration have adversely affected our financial condition
and results of operations. Specifically, our estimates of
nationwide home price changes, which measure home values
primarily based on repeat home sales indicated home price
declines of approximately 1% and 5%, in the three and six months
ended June 30, 2008, respectively, with significant
variation across regions and metropolitan areas. Home price
changes are an important market indicator for us because they
represent the general trend in value associated with the
single-family mortgage loans underlying our Mortgage
Participation Certificates, or PCs, and other mortgage-related
securities. As home prices decline, the risk of borrower
defaults generally increases and the severity of credit losses
also increases. Forecasts of nationwide home prices indicate a
continued overall decline in 2008.
Other trends in the single-family residential mortgage market
also reflect the weakening in the housing market. Since early
2006, the volume of new and existing home sales has declined and
increased inventories of unsold homes have undermined property
values. Demand for investor properties and second homes has also
declined dramatically. Annual total single-family conventional
mortgage originations are expected to continue to decline during
2008.
Credit concerns and resulting liquidity issues have also
affected the financial markets. Since mid-2007, the market for
non-agency mortgage-related securities has been characterized by
high levels of uncertainty, reduced demand, illiquidity and
significantly wider credit spreads. Non-agency mortgage-related
securities, particularly those backed by subprime and
Alt-A
mortgage products, have been subject to rating agency downgrades
and significant price declines in the market. The reduced
liquidity in U.S. financial markets prompted the Federal Reserve
to take several significant actions during the first half of
2008, including a series of reductions in the discount rate
totaling 2.50%. In early March 2008, the Federal Reserve
expanded its securities lending program to allow primary dealers
to borrow U.S. Treasury securities for 28 day terms
(rather than only overnight) with a pledge of other securities
by the borrower, including
AAA-rated,
private-issuer, residential mortgage securities. The Federal
Reserve has left key lending rates unchanged since May 2008;
however, credit and liquidity concerns have continued to affect
the market.
The rate reductions by the Federal Reserve have had an impact on
other key market rates affecting our assets and liabilities,
including generally reducing the return on our cash and
investments portfolio and lowering our cost of short-term debt
financing. In addition, the reduction in rates by the Federal
Reserve caused mortgage interest rates to temporarily decline
early in 2008 and drove a surge in refinancing activity during
the first four months of 2008. However, as residential mortgage
rates rose during the remainder of the second quarter, the pace
of refinancing activity slowed, and this is expected to also
slow the growth of new issuances for our guaranteed PCs and
Structured Securities portfolio during the second half of 2008.
The credit performance of mortgage products deteriorated during
2007 and 2008, most severely for subprime and
Alt-A
mortgage products. The decline in credit performance of
mortgages during 2008, particularly subprime mortgages, has also
impacted the ratings of certain monoline bond insurance
providers, or monolines, which has negatively affected the
pricing
of non-agency mortgage and asset-backed securities in the
market. We have direct and indirect exposure to monolines and
recognized other-than-temporary impairment losses related to
some of these exposures during the second quarter of 2008. See
CONSOLIDATED BALANCE SHEETS ANALYSIS Retained
Portfolio for additional information regarding our
exposure to monolines as well as mortgage-related securities
backed by subprime and
Alt-A loans.
Concerns about the potential for higher delinquency rates and
more severe credit losses have resulted in greater increases in
mortgage rates in the non-conforming and subprime portions of
the market. Many lenders have tightened credit standards or
elected to stop originating certain types of mortgages and
several mortgage originators have exited the origination
business. Decreases in home prices have also eroded the equity
of many homeowners seeking to refinance. These factors have
adversely affected many borrowers seeking alternative financing
to refinance out of non-traditional and adjustable-rate
mortgages, or ARMs.
The multifamily mortgage market differs from the residential
single-family market in several respects. The likelihood that a
multifamily borrower will make scheduled payments on its
mortgage is a function of the ability of the property to
generate income sufficient to make those payments, which is
affected by rent levels and the percentage of available units
that are occupied. Strength in the multifamily market therefore
is affected by the balance between the supply of and demand for
rental housing (both multifamily and single-family), which in
turn is affected by employment, the number of new units added to
the rental housing supply, rates of household formation and the
relative cost of owner-occupied housing alternatives. Although
multifamily market fundamentals have been strong in much of the
nation, liquidity concerns and wider credit spreads have spilled
over from the single-family mortgage market into the multifamily
segment during 2008. However, we have continued to support the
multifamily housing market during 2008 by making investments
that we believe have attractive expected returns.
Summary
of Financial Results for the Three and Six Months Ended
June 30, 2008
Generally
Accepted Accounting Principles, or GAAP, Results
Effective January 1, 2008, we adopted SFAS No. 157,
Fair Value Measurements, or SFAS 157,
which defines fair value, establishes a framework for measuring
fair value in financial statements and expands required
disclosures about fair value measurements. In connection with
the adoption of SFAS 157, we changed our method for
determining the fair value of our newly-issued guarantee
obligations. Under SFAS 157, the initial fair value of our
guarantee obligation equals the fair value of compensation
received, consisting of management and guarantee fees and other
upfront compensation, in the related securitization transaction,
which is a practical expedient for determining fair value. As a
result, prospectively from January 1, 2008, we no longer
record estimates of deferred gains or immediate, day
one losses on most guarantees. Our adoption of
SFAS 157 did not result in an immediate recognition of gain
or loss, but the prospective change had a positive impact on our
financial results for the three and six months ended
June 30, 2008.
Also effective January 1, 2008, we adopted SFAS 159 or
the fair value option, which permits companies to choose to
measure certain eligible financial instruments at fair value
that are not currently required to be measured at fair value in
order to mitigate volatility in reported earnings caused by
measuring assets and liabilities differently. We initially
elected the fair value option for certain available-for-sale
mortgage-related securities and our foreign-currency denominated
debt. Upon adoption of SFAS 159, we recognized a
$1.0 billion after-tax increase to our retained earnings at
January 1, 2008. We may continue to elect the fair value
option for certain securities to mitigate interest-rate aspects
of our guarantee asset and certain non-hedge designated
pay-fixed swaps.
Net income (loss) was $(821) million and $729 million
for the three months ended June 30, 2008 and 2007,
respectively. Net income (loss) was $(972) million and
$596 million for the six months ended June 30, 2008
and 2007, respectively. Net income decreased in the three and
six months ended June 30, 2008 compared to the same periods
of 2007, principally due to increased losses on investment
activity as well as increased credit-related expenses, which
consist of the provision for credit losses and real estate
owned, or REO, operations expense. These loss and expense items
for the three and six months ended June 30, 2008 were
partially offset by higher net interest income and income on our
guarantee obligation as well as lower losses on certain credit
guarantees and lower losses on loans purchased due to our use of
the practical expedient for determining fair value under
SFAS 157 and changes in our operational practice of
purchasing delinquent loans out of PC securitization pools.
Net interest income was $1.5 billion for the three months
ended June 30, 2008, compared to $793 million for the
three months ended June 30, 2007. Net interest income was
$2.3 billion for the six months ended June 30, 2008,
compared to $1.6 billion for the six months ended
June 30, 2007. After the limitation on the growth of our
retained portfolio expired, we were able to purchase significant
amounts of fixed-rate agency mortgage-related securities at
significantly wider spreads relative to our funding costs during
the three and six months ended June 30, 2008. This action
not only helped to serve our mission, but benefited our
customers and the secondary mortgage market. The increase in net
interest income and yield is also due to significantly lower
short-term interest rates on our short-term borrowings and lower
long-term interest rates on our long-term borrowings for the
three and six months ended June 30, 2008. In addition, a
higher proportion of short-term
debt, together with a lower proportion of floating rate
securities within our retained portfolio contributed to the
improvement in net interest income and net interest yield during
the three and six months ended June 30, 2008.
Non-interest income was $164 million and $895 million
for the three and six months ended June 30, 2008,
respectively, compared to non-interest income of
$1.5 billion for both the three and six months ended
June 30, 2007. The decrease in non-interest income in the
second quarter of 2008 was primarily due to higher losses on
investment activity, excluding foreign-currency related effects,
which was partially offset by gains on our guarantee asset,
increased income on our guarantee obligation and higher
management and guarantee income. Increased losses on investment
activity during the second quarter of 2008 were primarily due to
the impact of the increase in interest rates on our investments
classified as trading and security impairments recognized on
available-for-sale non-agency mortgage-related securities backed
by subprime and
Alt-A and
other loans. Our investments classified as trading securities
included those securities for which we elected fair value
accounting under SFAS 159. The election of SFAS 159
for these securities provides income statement recognition of
the economic hedge they provide against changes in the fair
value of our guarantee asset and our derivative portfolio
resulting from movements in interest rates. Losses related to
trading securities were partially offset by gains on our
guarantee asset and our derivative portfolio during the second
quarter of 2008. Income on our guarantee obligation was
$769 million and $474 million for the three months
ended June 30, 2008 and 2007, respectively and
$1.9 billion and $904 million for the six months ended
June 30, 2008 and 2007, respectively. Our amortization of
income on our guarantee obligation has accelerated in the three
and six months ended June 30, 2008 as compared to the same
2007 periods in order to match our economic release from risk on
the pools of mortgage loans we guarantee. Management and
guarantee income increased 28%, to $757 million for the
three months ended June 30, 2008 from $591 million for
the three months ended June 30, 2007. Management and
guarantee income increased to $1.5 billion, for the six
months ended June 30, 2008 from $1.2 billion for the
six months ended June 30, 2007. This reflects increases in
the average balance of our PCs and Structured Securities of 14%
and 15% on an annualized basis for the three and six months
ended June 30, 2008, respectively. The increase also
reflects higher average total management and guarantee fee rates
for the three and six months ended June 30, 2008 compared
to the same 2007 periods. See CONSOLIDATED RESULTS OF
OPERATIONS Non-Interest Income for further
discussion of our non-interest income.
Our non-interest expenses for the three months ended
June 30, 2008 and 2007 totaled $3.5 billion and
$1.5 billion, respectively. Our non-interest expenses for
the six months ended June 30, 2008 and 2007 totaled
$5.6 billion and $2.7 billion, respectively.
Credit-related expenses were $2.8 billion and
$0.5 billion for the three months ended June 30, 2008
and 2007, respectively. Credit-related expenses were
$4.3 billion and $0.7 billion for the six months ended
June 30, 2008 and 2007, respectively. For the three and six
months ended June 30, 2008, our provision for credit losses
increased due to credit deterioration in our single-family
credit guarantee portfolio, primarily due to increases in
delinquency rates and higher severity of losses on a
per-property basis. Credit deterioration has been largely driven
by declines in home prices and regional economic conditions as
well as the effect of a higher composition of nontraditional
products in the mortgage origination market purchased prior to
2008. Nontraditional mortgage products, such as interest-only
and Alt-A
loans, made up 20% to 30% of our mortgage purchase volume during
2006 and 2007. Due to changes in underwriting practice and
reduced originations in the market, these products made up
approximately 7% to 10% of our mortgage purchase volume during
the six months ended June 30, 2008. REO operations expense
increased as a result of an increase in market-based write-downs
of REO property due to the decline in home prices, coupled with
higher volumes in REO inventory, particularly in the states of
California, Florida, Arizona, Virginia and Nevada.
Non-interest expense, excluding credit-related expenses, for the
three and six months ended June 30, 2008 totaled
$743 million and $1.4 billion, compared to
$1.1 billion and $2.0 billion for the three and six
months ended June 30, 2007, respectively. The decline in
non-interest expense, excluding credit-related expenses, was
primarily due to the reductions in losses on certain credit
guarantees and losses on loans purchased. Losses on certain
credit guarantees decreased to $ and $15 million for
the three and six months ended June 30, 2008, compared to
$150 million and $327 million for the three and six
months ended June 30, 2007, due to the change in our method
for determining the fair value of our newly-issued guarantee
obligation upon adoption of SFAS 157 that we adopted
effective January 1, 2008. Losses on loans purchased
decreased to $120 million and $171 million for the
three and six months ended June 30, 2008, compared to
$264 million and $480 million for the three and six
months ended June 30, 2007, respectively, due to changes in
our operational practice of purchasing delinquent loans out of
PC pools. See CONSOLIDATED RESULTS OF
OPERATIONS Non-Interest Expense
Losses on Certain Credit Guarantees and
Losses on Loans Purchased, for
additional information on the change in our operational
practice. Administrative expenses totaled $404 million for
the three months ended June 30, 2008, down from
$442 million for the three months ended June 30, 2007.
As a percentage of our average total mortgage portfolio,
administrative expenses declined to 7.4 basis points for
the three months ended June 30, 2008, from 9.2 basis
points for the three months ended June 30, 2007.
Administrative expenses totaled $801 million for the six
months ended June 30, 2008, down from $845 million for
the six months ended June 30, 2007. As a percentage of our
average total mortgage portfolio,
administrative expenses declined to 7.5 basis points for
the six months ended June 30, 2008, from 8.9 basis
points for the six months ended June 30, 2007.
For the three months ended June 30, 2008 and 2007, we
recognized effective tax rates of 56% and 11%, respectively. For
the six months ended June 30, 2008 and 2007, we recognized
effective tax rates of 60% and (103)%, respectively. See
NOTE 12: INCOME TAXES to our consolidated
financial statements for additional information about how our
effective tax rate is determined.
Segments
We manage our business through three reportable segments:
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Investments;
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Single-family Guarantee; and
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Multifamily.
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Certain activities that are not part of a segment are included
in the All Other category. We manage and evaluate the
performance of the segments and All Other using a Segment
Earnings approach. Segment Earnings differs significantly from,
and should not be used as a substitute for, net income (loss) as
determined in accordance with GAAP. There are important
limitations to using Segment Earnings as a measure of our
financial performance. Among them, our regulatory capital
requirements are based on our GAAP results. Segment Earnings
adjusts for the effects of certain gains and losses and
mark-to-fair-value items which, depending on market
circumstances, can significantly affect, positively or
negatively, our GAAP results and which, in recent periods, have
caused us to record GAAP net losses. GAAP net losses will
adversely impact our regulatory capital, regardless of results
reflected in Segment Earnings. For a summary and description of
our financial performance on a segment basis, see
CONSOLIDATED RESULTS OF OPERATIONS Segment
Earnings and NOTE 16: SEGMENT REPORTING
in the accompanying notes to our consolidated financial
statements.
In managing our business, we present the operating performance
of our segments using Segment Earnings. Segment Earnings present
our results on an accrual basis as the cash flows from our
segments are earned over time. The objective of Segment Earnings
is to present our results in a manner more consistent with our
business models. The business model for our investment activity
is one where we generally buy and hold our investments in
mortgage-related assets for the long term, fund our investments
with debt and use derivatives to minimize interest rate risk and
generate net interest income in line with our return on equity
objectives. We believe it is meaningful to measure the
performance of our investment business using long-term returns,
not short-term value. The business model for our credit
guarantee activity is one where we are a long-term guarantor in
the conforming mortgage markets, manage credit risk and generate
guarantee and credit fees, net of incurred credit losses. As a
result of these business models, we believe that this
accrual-based metric is a meaningful way to present our results
as actual cash flows are realized, net of credit losses and
impairments. We believe Segment Earnings provides us with a view
of our financial results that is more consistent with our
business objectives, which helps us better evaluate the
performance of our business, both from period-to-period and over
the longer term.
Table 1 presents Segment Earnings (loss) by segment and the
All Other category and includes a reconciliation of Segment
Earnings (loss) to net income (loss) prepared in accordance with
GAAP.
Table 1
Reconciliation of Segment Earnings (Loss) to GAAP Net Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Segment Earnings (loss) after taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
793
|
|
|
$
|
571
|
|
|
$
|
906
|
|
|
$
|
1,085
|
|
Single-family Guarantee
|
|
|
(1,388
|
)
|
|
|
129
|
|
|
|
(1,846
|
)
|
|
|
353
|
|
Multifamily
|
|
|
118
|
|
|
|
84
|
|
|
|
216
|
|
|
|
209
|
|
All Other
|
|
|
144
|
|
|
|
(43
|
)
|
|
|
140
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
(333
|
)
|
|
|
741
|
|
|
|
(584
|
)
|
|
|
1,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
527
|
|
|
|
(471
|
)
|
|
|
(667
|
)
|
|
|
(1,553
|
)
|
Credit guarantee-related adjustments
|
|
|
1,818
|
|
|
|
831
|
|
|
|
1,644
|
|
|
|
329
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
(3,096
|
)
|
|
|
(379
|
)
|
|
|
(1,571
|
)
|
|
|
(310
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(105
|
)
|
|
|
(97
|
)
|
|
|
(215
|
)
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax adjustments
|
|
|
(856
|
)
|
|
|
(116
|
)
|
|
|
(809
|
)
|
|
|
(1,724
|
)
|
Tax-related adjustments
|
|
|
368
|
|
|
|
104
|
|
|
|
421
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(488
|
)
|
|
|
(12
|
)
|
|
|
(388
|
)
|
|
|
(992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss)
|
|
$
|
(821
|
)
|
|
$
|
729
|
|
|
$
|
(972
|
)
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
Segment
Our Investments segment is responsible for our investment
activity in mortgages and mortgage-related securities, other
investments, debt financing and managing our interest-rate risk,
liquidity and capital positions. We invest principally in
mortgage-related securities and single-family mortgage loans
through our mortgage-related investment portfolio.
We seek to generate attractive returns on our portfolio of
mortgage-related investments while maintaining a disciplined
approach to interest-rate risk and capital management. We seek
to accomplish this objective through opportunistic purchases,
sales and restructurings of mortgage assets and repurchases of
liabilities. Although we are primarily a buy-and-hold investor
in mortgage assets, we may sell assets to reduce risk, to
respond to capital constraints, to provide liquidity or to
structure certain transactions in order to improve our returns.
We estimate our expected investment returns using an
option-adjusted spread, or OAS, approach. Our Investments
segment activities may also include the purchase of mortgages
and mortgage-related securities with less attractive investment
returns and with incremental risk in order to achieve our
affordable housing goals and subgoals. Additionally, we maintain
a cash and non-mortgage-related securities investment portfolio
in this segment to help manage our liquidity needs.
Investments segment performance highlights for the three and six
months ended June 30, 2008:
|
|
|
|
|
Segment Earnings increased 39% to $793 million in the
second quarter of 2008 versus $571 million in the second
quarter of 2007. For the six months ended June 30, 2008,
Segment Earnings decreased 17% to $906 million from
$1.1 billion during the six months ended June 30, 2007.
|
|
|
|
Segment Earnings net interest yield increased 23 basis
points in the second quarter of 2008, as compared to the second
quarter of 2007, due to the purchase of fixed-rate assets at
significantly wider spreads relative to our funding costs and
the amortization of gains on certain futures positions that
matured in March 2008. Segment Earnings net interest yield
decreased 3 basis points in the six months ended
June 30, 2008 compared to the six months ended
June 30, 2007 due to spread compression between our
floating rate assets and liabilities during the first three
months of 2008, which was mostly offset by wider spreads in the
second quarter of 2008.
|
|
|
|
During the second quarter of 2008, we recognized security
impairments in Segment Earnings of $142 million associated
with anticipated future principal credit losses on our
non-agency mortgage-related securities.
|
|
|
|
Capital constraints and OAS levels that were not compelling
early in the first quarter of 2008 became less restrictive in
the latter part of the first quarter and through the second
quarter. Starting in March and continuing through the second
quarter of 2008, our net mortgage purchase commitments for the
mortgage-related investment portfolio were substantially higher
than earlier in 2008 in response to substantially wider OAS. The
unpaid principal balance of our mortgage-related investment
portfolio increased 9.8% to $728 billion at June 30,
2008 compared to $663 billion at December 31, 2007.
Agency securities comprised approximately 67% of the unpaid
principal balance of the mortgage-related investment portfolio
at June 30, 2008 versus 61% at December 31, 2007.
|
|
|
|
In addition during March 2008, OFHEO reduced our mandatory
target capital surplus to 20% allowing us to take advantage of
favorable investment opportunities. The ability to take
advantage of favorable investment opportunities not only helped
to serve our mission, but also benefited our customers and the
secondary mortgage market during the second quarter of 2008.
Also, effective March 1, 2008, we were no longer subject to
the voluntary growth limit of 2% annually on our retained
portfolio.
|
|
|
|
We continued to be able to issue debt securities at attractive
levels during the second quarter of 2008.
|
Single-family
Guarantee Segment
In our Single-family Guarantee segment, we securitize
substantially all of the newly or recently originated
single-family mortgages we have purchased and issue
mortgage-related securities called PCs that can be sold to
investors or held by us in our Investments segment. We guarantee
the payment of principal and interest on our single-family PCs,
including those held in our retained portfolio, in exchange for
management and guarantee fees, which are paid on a monthly basis
as a percentage of the underlying unpaid principal balance of
the loans, and initial upfront cash payments referred to as
credit or delivery fees. Earnings for this segment consist of
management and guarantee fee revenues, including amortization of
upfront payments, and trust management fees, less the related
credit costs (i.e., provision for credit losses) and
operating expenses. Also included is the interest earned on
assets held in the Investments segment related to single-family
guarantee activities, net of allocated funding costs.
Single-family Guarantee segment performance highlights for the
three and six months ended June 30, 2008 and 2007:
|
|
|
|
|
Segment Earnings (loss) decreased to $(1.4) billion for the
three months ended June 30, 2008 compared to earnings of
$129 million for the three months ended June 30, 2007.
Segment Earnings (loss) decreased to $(1.8) billion for the
six months ended June 30, 2008 compared to earnings of
$353 million for the six months ended June 30, 2007.
|
|
|
|
Segment Earnings provision for credit losses for the
Single-family Guarantee segment increased to $2.6 billion
for the three months ended June 30, 2008 from
$469 million for the three months ended June 30, 2007.
Segment Earnings
|
|
|
|
|
|
provision for credit losses for the Single-family Guarantee
segment increased to $4.0 billion for the six months ended
June 30, 2008 from $758 million for the six months
ended June 30, 2007.
|
|
|
|
|
|
Realized single-family credit losses for the three months ended
June 30, 2008 were 18.1 basis points of the average
single-family credit guarantee portfolio, compared to
2.0 basis points for the three months ended June 30,
2007. Realized single-family credit losses for the six months
ended June 30, 2008 were 15.1 basis points compared to
1.8 basis points for the six months ended June 30,
2007.
|
|
|
|
We implemented several delivery fee increases that were
effective at varying dates between March and June 2008, or as
our customers contracts permitted. These increases include
an additional 25 basis point fee assessed on all loans
issued through flow-business channels, as well as higher or new
delivery fees for certain mortgage products and for mortgages
deemed to be higher-risk based primarily on property type, loan
purpose, loan-to-value, or LTV ratio
and/or
borrower credit scores. We also implemented several changes in
our underwriting and eligibility criteria in early 2008 to
reduce our credit risk, including requiring our seller/servicers
to deliver loans with larger down payments and higher credit
scores, and limiting our acquisition of certain higher-risk loan
products, such as
Alt-A loans.
|
|
|
|
The single-family credit guarantee portfolio increased by 9% and
15% on an annualized basis for the three months ended
June 30, 2008 and 2007, respectively.
|
|
|
|
Average rates of Segment Earnings management and guarantee fee
income for the Single-family Guarantee segment increased to
18.7 basis points for the three months ended June 30,
2008 compared to 17.9 basis points for the three months
ended June 30, 2007. Average rates of Segment Earnings
management and guarantee fee income for the Single-family
Guarantee segment increased to 19.6 basis points for the
six months ended June 30, 2008 compared to 17.9 basis
points for the six months ended June 30, 2007.
|
Multifamily
Segment
Our Multifamily segment activities include purchases of
multifamily mortgages for our retained portfolio and guarantees
of payments of principal and interest on multifamily
mortgage-related securities and mortgages underlying multifamily
housing revenue bonds. The assets of the Multifamily segment
include mortgages that finance multifamily rental apartments.
Our Multifamily segment also includes certain equity investments
in various limited partnerships that sponsor low- and
moderate-income multifamily rental apartments, which benefit
from low-income housing tax credits, or LIHTC. These activities
support our mission to supply financing for affordable rental
housing. Also included is the interest earned on assets held in
our Investments segment related to multifamily guarantee
activities, net of allocated funding costs.
Multifamily segment performance highlights for the three and six
months ended June 30, 2008 and 2007:
|
|
|
|
|
Segment Earnings increased 40% to $118 million for the
three months ended June 30, 2008 versus $84 million
for the three months ended June 30, 2007. Segment Earnings
increased 3% to $216 million for the six months ended
June 30, 2008 versus $209 million for the six months
ended June 30, 2007.
|
|
|
|
Segment Earnings net interest income was $98 million for
the three months ended June 30, 2008, an increase of
$4 million versus the three months ended June 30, 2007
as a result of an increase in interest income on mortgage loans
due to higher average balances, partially offset by a decrease
in prepayment, or yield maintenance, fee income. Segment
Earnings net interest income was $173 million for the six
months ended June 30, 2008, a decline of $44 million
versus the six months ended June 30, 2007.
|
|
|
|
Mortgage purchases into our multifamily loan portfolio increased
approximately 74% for the three months ended June 30, 2008
to $4.2 billion from $2.4 billion for the three months
ended June 30, 2007. Mortgage purchases into our
multifamily loan portfolio increased approximately 49% for the
six months ended June 30, 2008 to $8.3 billion from
$5.5 billion for the six months ended June 30, 2007.
|
|
|
|
Unpaid principal balance of our multifamily mortgage loan
portfolio increased to $63.8 billion at June 30, 2008
from $57.6 billion at December 31, 2007 as market
fundamentals continued to provide opportunities to purchase
loans to be held in our portfolio.
|
|
|
|
Segment Earnings provision for credit losses for the Multifamily
segment totaled $7 million and $16 million for the
three and six months ended June 30, 2008, respectively.
Segment Earnings provision for credit losses for the Multifamily
segment totaled $1 million and $4 million for the
three and six months ended June 30, 2007, respectively.
|
Capital
Management
Our primary objective in managing capital is preserving our
safety and soundness and having sufficient capital to support
our business and mission. We make investment decisions while
considering our capital levels. OFHEO monitors our capital
adequacy using several capital standards. Beginning in January
2004, OFHEO directed us to maintain a 30% mandatory target
capital surplus above our statutory minimum capital requirement.
On March 19, 2008, OFHEO reduced our mandatory target
capital surplus to 20% above our statutory minimum capital
requirement, and in return we announced that
we would begin the process to raise capital and maintain overall
capital levels well in excess of requirements while the mortgage
markets recover. At June 30, 2008, our estimated regulatory
core capital was $37.1 billion, which is an estimated
$8.4 billion in excess of our statutory minimum capital
requirement and $2.7 billion in excess of the 20% mandatory
target capital surplus.
On May 14, 2008, we announced our commitment to raise
$5.5 billion of new core capital through one or more
offerings, which will likely include both common or common
equivalent and preferred securities. The timing, amount and mix
of securities to be offered will depend on a variety of factors,
including prevailing market conditions and approval by our board
of directors. OFHEO has informed us that, upon completion of
these offerings, our mandatory target capital surplus will be
reduced from 20% to 15%. OFHEO has also informed us that it
intends a further reduction of our mandatory target capital
surplus from 15% to 10% upon the combination of completion of
our SEC registration process, which was completed on
July 18, 2008, our completion of the remaining Consent
Order requirement (i.e., the separation of the positions
of Chairman and Chief Executive Officer), our continued
commitment to maintain capital well above OFHEOs
regulatory requirement and no material adverse changes to
ongoing regulatory compliance.
The sharp decline in the housing market and volatility in
financial markets continue to adversely affect our capital,
including our ability to manage to our regulatory capital
requirements and the 20% mandatory target capital surplus.
Factors that could adversely affect the adequacy of our capital
in future periods include our ability to execute capital raising
transactions; GAAP net losses; continued declines in home
prices; increases in our credit and interest-rate risk profiles;
adverse changes in interest-rates, the yield curve or implied
volatility; adverse OAS changes; impairments of non-agency
mortgage-related securities; downgrades of non-agency
mortgage-related securities (with respect to regulatory
risk-based capital); counterparty downgrades; legislative or
regulatory actions that increase capital requirements or changes
in accounting practices or standards.
Under current OFHEO regulations, the regulatory risk based
capital standard in particular is highly sensitive to underlying
drivers, including house price changes (based on OFHEOs
all transaction index); downgrades of non-agency
mortgage-related securities; counterparty downgrades; retained
portfolio growth; the duration, term and optionality of our
funding and hedging instruments; and other factors. While we
have historically met the risk-based capital standard, there is
a significant possibility that continued adverse developments in
relation to one or more of these underlying drivers could cause
us to fail to meet this standard. If we were not to meet the
risk-based capital standard, we would be classified as
undercapitalized by OFHEO. See ITEM 1.
BUSINESS REGULATION AND SUPERVISION
Office of Federal Housing Enterprise Oversight
Capital Standards and Dividend Restrictions and
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 9: REGULATORY
CAPITAL Classification in our Registration
Statement for information regarding potential actions OFHEO may
seek to take in that event. Under the Regulatory Reform Act,
FHFA is charged with developing risk-based capital requirements
by regulation. The nature of the requirements FHFA may
eventually adopt pursuant to this authority is currently
uncertain.
Also affecting our capital position was our adoption of
SFAS 159 on January 1, 2008. Our election of the fair
value option allows us to better reflect, in the financial
statements, the economic offsets that exist related to items
that were not previously recognized at fair value with changes
in fair value reflected in our consolidated statements of
income. We expect our adoption of the fair value option will
reduce the impact of interest-rate changes on our net income
(loss) and capital levels. However, since changes in OAS affect
the gains (losses) on both our mortgage-related trading
portfolio and guarantee asset, our adoption of SFAS 159
will increase the impact of OAS changes on net income (loss) and
capital. For a further discussion of our adoption of
SFAS 159 see NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Change in Accounting
Principles to our consolidated financial statements.
Beginning in the first quarter of 2008, we initiated our use of
cash flow hedge accounting relationships to include hedging the
changes in cash flows associated with our forecasted issuances
of debt. We expect this accounting strategy will reduce the
effect of interest-rate changes on our capital. We also employed
this accounting strategy while maintaining our disciplined
approach to interest-rate risk management. See
NOTE 10: DERIVATIVES to our consolidated
financial statements for additional information about our
derivatives designated as cash flow hedges.
We expect to take actions to maintain our capital position above
the OFHEO-directed mandatory target surplus. Accordingly,
subject to approval by our Board of Directors, we currently
expect to reduce the dividend on our common stock in the third
quarter of 2008 from $0.25 to $0.05 or less per share and to pay
the full dividends at contractual rates on our preferred stock.
In addition, we continue to review and consider other
alternatives for managing our capital including issuing equity
in amounts that could be substantial and materially dilutive to
our existing shareholders, reducing or rebalancing risk, slowing
purchases into our credit guarantee portfolio and limiting the
growth or reducing the size of our retained portfolio by
allowing the portfolio to run off and/or by selling securities
classified as trading or carried at fair value under
SFAS 159 or available-for-sale securities that are
accretive to capital (i.e., fair value exceeds amortized
cost). We have retained and are working with financial advisors
and we continue to engage in discussions with OFHEO and the
Treasury on these matters.
Our ability to execute any of these actions or their
effectiveness may be limited and we might not be able to manage
to our regulatory capital requirements and the mandatory target
capital surplus. If we are not able to manage to the mandatory
target capital surplus, OFHEO may, among other things, seek to
require us to (a) submit a plan for remediation or
(b) take other remedial steps. In addition, OFHEO has
discretion to reduce our capital classification by one level if
OFHEO determines that we are engaging in conduct that could
result in a rapid depletion of core capital or determines that
the value of property subject to mortgage loans we hold or
guarantee has decreased significantly. See
PART II ITEM 1A. RISK FACTORS in
this Form 10-Q and ITEM 1. BUSINESS
REGULATION AND SUPERVISION Office of Federal Housing
Enterprise Oversight Capital Standards and
Dividend Restrictions and ITEM 13.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING
NOTES NOTE 9: REGULATORY CAPITAL
Classification in our Registration Statement for
information regarding additional potential actions OFHEO may
seek to take against us. See Legislative and Regulatory
Matters Government Sponsored Enterprise, or GSE,
Oversight Legislation in this Form 10-Q for
information regarding the enhanced regulatory authorities FHFA
now possesses.
Fair
Value Results
Our consolidated fair value measurements are a component of our
risk management processes, as we use daily estimates of the
changes in fair value to calculate our Portfolio Market Value
Sensitivity, or PMVS, and duration gap measures.
During the three months ended June 30, 2008, the fair value
of net assets, before capital transactions, remained unchanged
compared to a $0.7 billion increase during the three months
ended June 30, 2007.
Our attribution of changes in the fair value of net assets
relies on models, assumptions and other measurement techniques
that evolve over time. The following attribution of changes in
fair value reflects our current estimate of the items presented
(on a pre-tax basis) and excludes the effect of returns on
capital and administrative expenses.
During the three months ended June 30, 2008, our investment
activities increased fair value by approximately
$6.7 billion, resulting from a higher core spread income
and an increase in fair value of approximately $1.9 billion
attributable to net mortgage-to-debt OAS tightening. Core spread
income on our retained portfolio is a fair value estimate of the
net current period accrual of income from the spread between
mortgage-related investments and debt, calculated on an
option-adjusted basis.
During the three months ended June 30, 2007, our investment
activities decreased fair value by approximately
$0.8 billion. This estimate includes declines in fair value
of approximately $1.4 billion attributable to the net
widening of mortgage-to-debt OAS.
The impact of mortgage-to-debt OAS tightening during the three
months ended June 30, 2008 increased the current fair value
of our investment activities. Due to the still relatively wide
OAS levels for purchases during the period, there is a
likelihood that, in future periods, we will be able to recognize
core spread income from our investment activities at a higher
spread level than historically. We estimate that for the three
months ended June 30, 2008, we will recognize core spread
income at a net mortgage-to-debt OAS level of approximately 140
to 160 basis points in the long run, as compared to
approximately 25 to 35 basis points estimated for the three
months ended June 30, 2007. As market conditions change,
our estimate of expected fair value gains from OAS may also
change, leading to significantly different fair value results.
During the three months ended June 30, 2008, our credit
guarantee activities, including our single-family whole loan
credit exposure, decreased fair value by an estimated
$6.2 billion. This estimate includes an increase in the
single-family guarantee obligation of approximately
$7.2 billion, primarily attributable to a declining credit
environment.
Our credit guarantee activities increased fair value by an
estimated $1.8 billion during the three months ended
June 30, 2007. This increase includes the receipt of cash
primarily related to management, guarantee and other up-front
fees. This increase also includes a fair value increase related
to our single-family guarantee asset of approximately
$1.8 billion, primarily attributable to an increase in
interest rates during the three months ended June 30, 2007.
These increases were partially offset by an increase in the fair
value of our single-family guarantee obligation of approximately
$0.6 billion.
See CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS
for additional information regarding attribution of changes in
the fair value of net assets for the six months ended
June 30, 2008.
Legislative
and Regulatory Matters
Government
Sponsored Enterprise, or GSE, Oversight
Legislation
The Regulatory Reform Act was signed into law on July 30,
2008. This Act consolidates regulation of Freddie Mac and
Federal National Mortgage Association, or Fannie Mae, or the
enterprises, and the Federal Home Loan Banks, or FHLBs, into a
single new regulator, FHFA. FHFA is an independent agency of the
federal government responsible for oversight of the operations
of the enterprises and the FHLBs. OFHEO will remain in existence
for a transition period of up to one year.
FHFA has a Director appointed by the President and confirmed by
the Senate for a five-year term, removable only for cause. The
Regulatory Reform Act authorizes the Director of OFHEO on the
date of enactment to act for all purposes and with the full
powers of the Director of FHFA until such Director is appointed
and confirmed.
The Regulatory Reform Act also establishes the Federal Housing
Finance Oversight Board, or the Oversight Board which is
responsible for advising the Director of FHFA with respect to
overall strategies and policies. The Oversight Board consists of
the Director of FHFA as Chairperson, the Secretary of the
Treasury, the Chairman of the SEC and the Secretary of HUD.
The Regulatory Reform Act gives our regulator substantial
authority to assess our safety and soundness and to regulate our
portfolio investments, including requiring reductions in those
investments, consistent with our mission and safe and sound
operations. The Act also includes provisions that increase the
regulators authority to change our minimum and risk-based
capital levels and to regulate our business activities. In
addition, the Act requires us to make certain contributions to
affordable housing funds administered by the Secretary of HUD
and the Secretary of the Treasury.
Given the recent enactment of this Act and the fact that FHFA
has considerable discretion in implementing its provisions,
including through rulemaking proceedings and the issuance of
orders, we cannot predict the impacts that the Act and
FHFAs exercise of its authority under the Act will have on
our business, financial position or results of operations.
However, to the extent the Act or regulations or orders issued
by FHFA pursuant to the Act may, for example, increase our
capital requirements, limit our portfolio and new product
activities, increase our affordable housing goals, or limit our
ability to attract and retain senior executives, we anticipate
that the impact could be materially adverse. Certain of the more
significant provisions of the Act are summarized below.
Capital
FHFA may increase minimum capital levels from the existing
statutory percentages either by regulation or on a temporary
basis by order. FHFA may also, by regulation or order, establish
capital or reserve requirements with respect to any product or
activity of an enterprise, as FHFA considers appropriate. In
addition, FHFA must, by regulation, establish risk-based capital
requirements to ensure the enterprises operate in a safe and
sound manner, maintaining sufficient capital and reserves to
support the risks that arise in their operations and management.
The Act provides FHFA with greater authority to take additional
remedial actions as an enterprises capital levels decline.
Portfolio
Activities
The Regulatory Reform Act requires FHFA to establish, by
regulation, criteria governing retained portfolio holdings to
ensure the holdings are backed by sufficient capital and
consistent with the enterprises mission and safe and sound
operations. In establishing these criteria, FHFA must consider
the ability of the enterprises to provide a liquid secondary
market through securitization activities, the portfolio holdings
in relation to the mortgage market and the enterprises
compliance with the prudential management and operations
standards prescribed by FHFA.
FHFA may make temporary adjustments to the established portfolio
standards by issuing an order to a particular enterprise, such
as during times of economic distress or market disruption. In
addition, FHFA must monitor the portfolio of each enterprise and
may, by order, require an enterprise on such terms and
conditions as FHFA determines appropriate to dispose of, or to
acquire, any asset if FHFA determines such action is consistent
with certain statutory purposes and the enterprises
authorizing statutes.
New
Products
The Regulatory Reform Act requires the enterprises to obtain the
approval of FHFA before initially offering any new product.
Excluded from the product review process are automated loan
underwriting systems of the enterprises in existence on
July 30, 2008, including upgrades; any modification to
mortgage terms and conditions or underwriting criteria relating
to mortgages purchased or guaranteed, as long as the
modifications do not change the underlying transaction to
include services or financing other than residential mortgage
financing; and any other activities that are substantially
similar to the activities described above or that have
previously been approved by FHFA. The Act provides for a public
comment process on requests for approval of new products. FHFA
may temporarily approve a product without soliciting public
comment if delay would be contrary to the public interest. FHFA
may condition approval of a product on specific terms,
conditions and limitations. The standards for FHFAs
approval of a new product are that the product is authorized by
the enterprises charter, is in the public interest and is
consistent with the safety and soundness of the enterprise or
the mortgage finance system.
Prudential
Management and Operations Standards
The Regulatory Reform Act requires FHFA to establish prudential
standards, by regulation or by guideline, for a broad range of
operations of the enterprises. These standards must address
internal controls, information systems, independence and
adequacy of internal audit systems, management of interest rate
risk, management of market risk, liquidity and reserves,
management of asset and investment portfolio growth, overall
risk management processes, investments and asset acquisitions,
management of credit and counterparty risk, and recordkeeping.
FHFA may also establish any additional operational and
management standards the Director of FHFA determines appropriate.
If an enterprise or a FHLB fails to comply with the standards,
FHFA could require submission of a plan to correct the
deficiency. If the enterprise fails to submit an acceptable
plan, or fails in any material respect to carry out an accepted
plan, FHFA must order correction of the deficiency and may
impose certain growth restrictions, require an increase in the
ratio of core capital to assets and require other actions. FHFA
must take one or more of these actions if FHFA determines that
an enterprise has failed to meet a standard, the deficiency has
not been corrected, and the enterprise underwent extraordinary
growth, as defined by the Director of FHFA, during the
18-month
period before the date of failure to meet a standard.
Affordable
Housing Goals
Under the Regulatory Reform Act, the annual affordable housing
goals previously established by HUD and in place for 2008 remain
in effect for 2009, except that within 270 days from
July 30, 2008, FHFA must review the 2009 housing goals to
determine the feasibility of such goals in light of current
market conditions and, after seeking public comment for up to
30 days, FHFA may make appropriate adjustments to the 2009
goals consistent with market conditions.
Effective beginning calendar year 2010, the Regulatory Reform
Act replaces the existing annual affordable housing goals with
the requirement that FHFA establish the following annual
affordable housing goals by regulation:
Single-family
Housing Goals
|
|
|
|
|
FHFA must establish goals for the purchase of conventional,
conforming, single-family, owner-occupied, purchase money
mortgages financing housing for each of the following:
(i) low-income families, (ii) families that reside in
low-income areas and (iii) very low-income families. The
goals must be established as a percentage of total single-family
dwelling units financed by single-family purchase money
mortgages.
|
|
|
|
FHFA must also establish a goal for the purchase of
conventional, conforming, single-family, owner-occupied
refinance mortgages given to pay off or prepay an existing
mortgage on the same property for low-income families. The goals
must be established as a percentage of total single-family
dwelling units refinanced by mortgage purchases.
|
|
|
|
In addition to the above goals, FHFA has discretion to establish
additional requirements for mortgages on single-family,
owner-occupied rental housing units.
|
Multifamily
Special Affordable Housing Goal
|
|
|
|
|
FHFA must establish a goal, by either unit or dollar volume, for
the purchase of mortgages that finance dwelling units affordable
to low-income families, and also requirements for mortgages that
finance dwelling units affordable to very low-income families.
FHFA has discretion to establish additional requirements for
mortgages on smaller multifamily properties.
|
The Regulatory Reform Act allows an enterprise to petition FHFA
for a reduction in any goal or subgoal at any time, and
authorizes FHFA to reduce the level of the goal or subgoal only
if market and economic conditions or the financial condition of
the enterprise require such a reduction, or if efforts to meet
the goal would result in the constraint of liquidity,
over-investment in certain market segments or other consequences
contrary to the intent of the goals or the public purposes of
the enterprises.
The Regulatory Reform Act requires FHFA to establish annual
goals targets, by regulation, for each goal described above. In
establishing the single-family targets, FHFA must take into
consideration national housing needs; economic, housing and
demographic conditions, including expected market developments;
the performance and effort of the enterprises toward achieving
the housing goals in previous years; the size of the purchase
money conventional or refinance conventional mortgage market, as
applicable; the ability of the enterprise to lead the industry
in making mortgage credit available; the need to maintain the
sound financial condition of the enterprises; and the prior
three years of information under the Home Mortgage Disclosure
Act of 1975 for conventional, conforming, single-family,
owner-occupied purchase money and refinance mortgages, as
applicable.
In establishing the multifamily target, FHFA must take into
consideration national multifamily credit needs and the ability
of the enterprises to provide additional liquidity and stability
for the multifamily market, the performance and effort of the
enterprises towards achieving the housing goals in previous
years, the size of the multifamily market, the ability of the
enterprises to lead the industry in making multifamily mortgage
credit available, the availability of public subsidies, and the
need to maintain the sound financial condition of the
enterprises.
FHFA may change annual targets, by regulation, to reflect market
conditions and subsequent available data. The targets cannot
consider segments of the market that are inconsistent with
safety and soundness, unauthorized for purchase by the
enterprises pursuant to regulation or, for single-family
targets, contrary to good lending practices.
In addition, the Regulatory Reform Act creates a duty to serve
underserved markets requiring the enterprises to provide
leadership to the market in developing loan products and
flexible underwriting guidelines to facilitate a secondary
market for
mortgages on manufactured homes, for affordable housing
preservation, and for housing in rural areas. FHFA must
establish, by regulation effective beginning 2010, a manner for
evaluating compliance with the duty to serve underserved markets
and for rating the extent of compliance, and include the
evaluation and rating in FHFAs annual report to Congress.
Affordable
Housing Allocations
The Regulatory Reform Act requires each enterprise to set aside,
in each fiscal year, an amount equal to 4.2 basis points of the
unpaid principal balance of total new business purchases, and to
allocate or transfer (1) 65% of such amounts to the
Secretary of HUD to fund the Housing Trust Fund program to
be established and managed by the Secretary of HUD, and
(2) 35% of such amounts to the Capital Magnet Fund to be
established and managed by the Secretary of the Treasury. FHFA
must suspend the allocation of an enterprise upon finding that
the payment is contributing, or would contribute, to the
financial instability of the enterprise; is causing, or would
cause, the enterprises capital to be classified as
undercapitalized; or is preventing, or would prevent, the
enterprise from successfully completing a capital restoration
plan. FHFA must promulgate regulations prohibiting the
enterprises from passing on the cost of contributions through
increased charges or fees or decreased premiums, or in any other
manner, to the originators of mortgages purchased or securitized
by the enterprise.
Loan
Limits
The Regulatory Reform Act allows increases in single-family
conforming loan limits based on changes in the new housing price
index established by FHFA, beginning January 1, 2009.
Consistent with existing OFHEO Examination Guidance,
Conforming Loan Limit Calculations, decreases would
be accumulated and would offset any future increases in the
housing price index so that loan limits do not decrease from
year-to-year. In high-cost areas where 115% of the
median home price exceeds the otherwise applicable conforming
loan limit the Regulatory Reform Act increases the
loan limits to the lesser of (i) 115% of the median house
price or (ii) 150% of the conforming loan limit, currently
$625,500. The high-cost provisions on loan limits become
effective January 1, 2009 when the temporary authority for
purchases of high-cost loans granted by the Economic Stimulus
Act of 2008 expires.
Executive
Compensation
The Regulatory Reform Act provides FHFA with executive
compensation authority that extends beyond the authority OFHEO
possessed.
In determining whether executive compensation for an enterprise
executive officer is prohibited under the reasonable and
comparable standard contained in existing law, FHFA is
authorized to take into account any factors it considers
relevant, including any wrongdoing on the part of the executive
officer, such as any fraudulent act or omission, breach of trust
or fiduciary duty, any violation of law, rule, regulation,
order, or written agreement, and insider abuse with respect to
the enterprise. A determination by FHFA that termination
compensation is prohibited would override any contrary
contractual provisions, even if such provisions had been
previously approved.
FHFA is also authorized to require an enterprise to withhold, or
place in escrow, a payment, transfer or disbursement of
compensation pending review of the reasonableness and
comparability of such compensation. The Regulatory Reform Act
amends the enterprises charters expressly to prohibit the
transfer, disbursement or payment of compensation to any
executive officer or entry into an agreement with an executive
officer for matters being reviewed by FHFA under its authority
to prohibit compensation that is not reasonable and comparable.
In addition, FHFA is authorized to prohibit or limit, by
regulation or order, certain golden parachute and
indemnification payments to an affiliated party of the
enterprises. The Director is to prescribe, by regulation, the
factors to be considered in limiting golden parachute and
indemnification payments.
FHFA
Enforcement Authority
The Regulatory Reform Act expands the grounds for issuing both
permanent and temporary
cease-and-desist
orders against the enterprises and affiliated parties to include
grounds such as unsafe or unsound practices. The amounts of
civil money penalties FHFA may impose are increased
substantially. In addition, FHFA has new authority to remove
certain affiliated parties of the enterprises and to prohibit
them from further participation in the industry. The Regulatory
Reform Act also provides expanded authority to enforce the
affordable housing goals.
Conservatorship
and Receivership
The Regulatory Reform Act replaces the conservatorship
provisions previously applicable to the enterprise with
conservatorship and receivership provisions based generally on
federal banking law. The Regulatory Reform Act expands the
grounds for which an enterprise may be placed into
conservatorship, establishes the grounds for which an enterprise
may be placed into receivership, and provides for appointment of
FHFA as conservator or receiver. FHFA has broad powers when
acting as conservator or receiver of an enterprise. As
conservator, FHFA may take such actions as may be necessary for
restoring the enterprise to a sound and solvent condition, and
appropriate to carry on the business of the enterprise and to
conserve the assets and property of the enterprise. As receiver,
FHFA must liquidate and proceed to realize upon the assets of
an enterprise in such manner as FHFA deems appropriate,
including through the sale of assets, through the transfer of
assets to a limited-life regulated entity which succeeds to the
charter of the enterprise and operates in accordance with the
charter and other applicable laws, or through the exercise of
other rights and privileges granted FHFA.
As either conservator or receiver, FHFA has the power to take
over the assets of an enterprise and operate with all the powers
of the shareholders, directors and officers of the enterprise.
In addition, among other powers as conservator or receiver, FHFA
may replace management, transfer or sell any asset or liability
of an enterprise in default without any approval, assignment or
consent with respect to such transfer or sale, and repudiate
contracts entered into prior to appointment if, in the sole
discretion of FHFA, FHFA determines such contracts to be
burdensome and determines repudiation will promote the orderly
administration of affairs. The Regulatory Reform Act contains
special provisions applicable to service contracts, leases,
contracts for the purchase of real property and qualified
financial contracts such as forward contracts, repurchase
agreements and swap agreements.
Temporary
Treasury Authority to Purchase GSE Obligations and
Securities
The Regulatory Reform Act grants the Secretary of the Treasury
authority to purchase any obligations and securities issued by
the enterprises until December 31, 2009 on such terms and
conditions and in such amounts as the Secretary may determine,
provided that the Secretary determines the purchases are
necessary to provide stability to the financial markets, prevent
disruptions in the availability of mortgage finance, and protect
taxpayers. The Secretary may not engage in open market purchases
of the common stock of an enterprise in the absence of an
agreement with the enterprise, and the enterprises are not
required to issue obligations or securities to the Secretary
without mutual agreement.
In connection with exercising this temporary purchase authority,
the Secretary of the Treasury must consider the need for
preferences regarding payments to the government; limits on
maturity or disposal of the enterprise obligations and
securities purchased; the enterprises plan for orderly
resumption of private market funding or capital market access;
the probability of the enterprise fulfilling the terms of the
obligations and securities, including repayment; the need to
maintain the status of the enterprise as a private
shareholder-owned company; and restrictions on the use of
enterprise resources, including limits on dividend payments and
executive compensation. The Regulatory Reform Act also grants
FHFA temporary authority to approve, disapprove or modify
executive compensation for top executive officers for which
compensation must be disclosed publicly pursuant to the
SECs
Regulation S-K.
These authorities of both FHFA and Treasury expire on
December 31, 2009.
Temporary
Consultative Requirement Between the Director of FHFA and the
Chairman of the Federal Reserve
The Regulatory Reform Act requires FHFA to consult with, and
consider the views of, the Chairman of the Federal Reserve
regarding the risks posed by the enterprises to the financial
system prior to issuing any proposed or final regulations,
orders, or guidelines with respect to prudential management and
operations standards, safe and sound operations, capital
requirements and portfolio standards. In addition, the
Regulatory Reform Act requires consultation regarding any
decision to place an enterprise into conservatorship or
receivership. To facilitate the consultative process, the
Regulatory Reform Act requires periodic sharing of information
between FHFA and the Federal Reserve regarding the capital,
assets and liabilities, financial condition and risk management
practices of the enterprises and any information related to
financial market stability. This consultative requirement
expires December 31, 2009.
Composition
of Board of Directors
The Regulatory Reform Act eliminates the five Presidential
appointees from the boards of directors of the enterprises,
leaving 13 shareholder-elected members, and allows FHFA to
determine that a different number of board members is
appropriate. The Regulatory Reform Act leaves in place the
requirements for having board members from the home building,
mortgage lending, and real estate industries and from an
organization representing consumer or community interests.
Temporary
Increase in Conforming Loan Limits
On February 13, 2008, the President signed into law the
Economic Stimulus Act of 2008, which includes a temporary
increase in conventional conforming loan limits that apply to
the GSEs as well as the Federal Housing Administration, or FHA.
The law raises the conforming loan limits for mortgages
originated in certain high-cost areas from July 1, 2007
through December 31, 2008 to the higher of the applicable
2008 conforming loan limits, set at $417,000 for a mortgage
secured by a
one-unit,
single-family residence, or 125% of the median house price for a
geographic area, not to exceed $729,750 for a
one-unit,
single-family residence. We began accepting these
conforming-jumbo mortgages for securitization as PCs
and purchases into our retained portfolio in April 2008. Our
purchases of these loans into our total mortgage portfolio for
the three months ended June 30, 2008 totaled
$471 million in unpaid principal balance. We have
experienced increased competition in the mortgage finance market
during the first half of 2008 with respect to this product.
Given market conditions and competition especially from FHA, we
do not anticipate purchasing material amounts of conforming
jumbo product in 2008.
Voluntary,
Temporary Growth Limit
In response to a request by OFHEO on August 1, 2006, we
announced that we would voluntarily and temporarily limit the
growth of our retained portfolio to 2% annually. Consistent with
OFHEOs February 27, 2008 announcement of the removal
of the growth limit on March 1, 2008, the growth limit has
expired.
Risk-based
Capital
On June 10, 2008, OFHEO announced two rule changes for loss
severity calculations under OFHEOs risk-based capital
regulation. These changes became effective on June 25, 2008
for our third quarter 2008 risk-based capital submission.
According to OFHEO, these rule changes correct certain
deficiencies in the formulas used to calculate risk-based
capital. The first change was implemented because certain loss
severity equations resulted in the GSEs recording profits
instead of losses on foreclosed mortgages during the calculation
of the risk-based capital requirement. Unaltered, the loss
severity equations overestimated GSE recoveries for defaulted
government-guaranteed and low LTV ratio mortgages. Those results
were not consistent with the risk-based capital regulation and
resulted in significant reductions to the risk-based capital
requirements of the GSEs. The second change was implemented
because the prior treatment of FHA insurance associated with
single-family mortgages with an LTV below 78% is inconsistent
with current law. According to OFHEO, implementation of these
rule changes would have increased our risk-based capital
requirement by $5.4 billion at December 31, 2006 had
they been in effect at that time.
Mission
and Affordable Housing Goals
In March 2008, we reported to HUD that we did not achieve two
home purchase subgoals (the low- and moderate-income subgoal and
the special affordable housing subgoal) for 2007. We believe
that achievement of these two home purchase subgoals was
infeasible in 2007 under the terms of the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992, or the
GSE Act, and accordingly submitted an infeasibility analysis to
HUD. In April 2008, HUD notified us that it had determined that,
given the declining affordability of the primary market since
2005, the scope of market turmoil in 2007, and the collapse of
the non-agency, or private label, secondary mortgage market, the
availability of subgoal-qualifying home purchase loans was
reduced significantly and therefore achievement of these
subgoals was infeasible. Consequently, we will not submit a
housing plan to HUD.
In 2008, we expect that the market conditions discussed above
and the tightened credit and underwriting environment will
continue to make achieving our affordable housing goals and
subgoals challenging.
SELECTED
FINANCIAL DATA AND OTHER OPERATING
MEASURES(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Six
|
|
|
|
|
|
|
Months Ended June 30,
|
|
|
At or for the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(dollars in millions, except share-related amounts)
|
|
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
2,327
|
|
|
$
|
1,564
|
|
|
$
|
3,099
|
|
|
$
|
3,412
|
|
|
$
|
4,627
|
|
|
$
|
8,313
|
|
|
$
|
8,598
|
|
Non-interest income (loss)
|
|
|
895
|
|
|
|
1,472
|
|
|
|
194
|
|
|
|
2,086
|
|
|
|
1,003
|
|
|
|
(2,723
|
)
|
|
|
532
|
|
Non-interest expense
|
|
|
(5,648
|
)
|
|
|
(2,743
|
)
|
|
|
(9,270
|
)
|
|
|
(3,216
|
)
|
|
|
(3,100
|
)
|
|
|
(2,378
|
)
|
|
|
(2,123
|
)
|
Net income (loss) before cumulative effect of change in
accounting principle
|
|
|
(972
|
)
|
|
|
596
|
|
|
|
(3,094
|
)
|
|
|
2,327
|
|
|
|
2,172
|
|
|
|
2,603
|
|
|
|
4,809
|
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(972
|
)
|
|
|
596
|
|
|
|
(3,094
|
)
|
|
|
2,327
|
|
|
|
2,113
|
|
|
|
2,603
|
|
|
|
4,809
|
|
Net income (loss) available to common stockholders
|
|
$
|
(1,476
|
)
|
|
$
|
405
|
|
|
$
|
(3,503
|
)
|
|
$
|
2,051
|
|
|
$
|
1,890
|
|
|
$
|
2,392
|
|
|
$
|
4,593
|
|
Earnings (loss) per common share before cumulative effect of
change in accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.28
|
)
|
|
$
|
0.62
|
|
|
$
|
(5.37
|
)
|
|
$
|
3.01
|
|
|
$
|
2.82
|
|
|
$
|
3.47
|
|
|
$
|
6.68
|
|
Diluted
|
|
|
(2.28
|
)
|
|
|
0.61
|
|
|
|
(5.37
|
)
|
|
|
3.00
|
|
|
|
2.81
|
|
|
|
3.46
|
|
|
|
6.67
|
|
Earnings (loss) per common share after cumulative effect of
change in accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.28
|
)
|
|
$
|
0.62
|
|
|
$
|
(5.37
|
)
|
|
$
|
3.01
|
|
|
$
|
2.73
|
|
|
$
|
3.47
|
|
|
$
|
6.68
|
|
Diluted
|
|
|
(2.28
|
)
|
|
|
0.61
|
|
|
|
(5.37
|
)
|
|
|
3.00
|
|
|
|
2.73
|
|
|
|
3.46
|
|
|
|
6.67
|
|
Dividends per common share
|
|
$
|
0.50
|
|
|
$
|
1.00
|
|
|
$
|
1.75
|
|
|
$
|
1.91
|
|
|
$
|
1.52
|
|
|
$
|
1.20
|
|
|
$
|
1.04
|
|
Weighted average common shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
646,603
|
|
|
|
657,103
|
|
|
|
651,881
|
|
|
|
680,856
|
|
|
|
691,582
|
|
|
|
689,282
|
|
|
|
687,094
|
|
Diluted
|
|
|
646,603
|
|
|
|
659,365
|
|
|
|
651,881
|
|
|
|
682,664
|
|
|
|
693,511
|
|
|
|
691,521
|
|
|
|
688,675
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
879,043
|
|
|
$
|
814,118
|
|
|
$
|
794,368
|
|
|
$
|
804,910
|
|
|
$
|
798,609
|
|
|
$
|
779,572
|
|
|
$
|
787,962
|
|
Senior debt, due within one year
|
|
|
326,303
|
|
|
|
267,919
|
|
|
|
295,921
|
|
|
|
285,264
|
|
|
|
279,764
|
|
|
|
266,024
|
|
|
|
279,180
|
|
Senior debt, due after one year
|
|
|
505,013
|
|
|
|
478,295
|
|
|
|
438,147
|
|
|
|
452,677
|
|
|
|
454,627
|
|
|
|
443,772
|
|
|
|
438,738
|
|
Subordinated debt, due after one year
|
|
|
4,496
|
|
|
|
5,227
|
|
|
|
4,489
|
|
|
|
6,400
|
|
|
|
5,633
|
|
|
|
5,622
|
|
|
|
5,613
|
|
All other liabilities
|
|
|
30,152
|
|
|
|
37,867
|
|
|
|
28,911
|
|
|
|
33,139
|
|
|
|
31,945
|
|
|
|
32,720
|
|
|
|
32,094
|
|
Minority interests in consolidated subsidiaries
|
|
|
131
|
|
|
|
282
|
|
|
|
176
|
|
|
|
516
|
|
|
|
949
|
|
|
|
1,509
|
|
|
|
1,929
|
|
Stockholders equity
|
|
|
12,948
|
|
|
|
24,528
|
|
|
|
26,724
|
|
|
|
26,914
|
|
|
|
25,691
|
|
|
|
29,925
|
|
|
|
30,408
|
|
Portfolio
Balances(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
portfolio(3)
|
|
$
|
791,798
|
|
|
$
|
712,136
|
|
|
$
|
720,813
|
|
|
$
|
703,959
|
|
|
$
|
710,346
|
|
|
$
|
653,261
|
|
|
$
|
645,767
|
|
Total PCs and Structured Securities
issued(4)
|
|
|
1,823,803
|
|
|
|
1,592,524
|
|
|
|
1,738,833
|
|
|
|
1,477,023
|
|
|
|
1,335,524
|
|
|
|
1,208,968
|
|
|
|
1,162,068
|
|
Total mortgage portfolio
|
|
|
2,201,694
|
|
|
|
1,952,949
|
|
|
|
2,102,676
|
|
|
|
1,826,720
|
|
|
|
1,684,546
|
|
|
|
1,505,531
|
|
|
|
1,414,700
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average
assets(5)
|
|
|
(0.2
|
)%
|
|
|
0.1
|
%
|
|
|
(0.4
|
)%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.6
|
%
|
Return on common
equity(6)
|
|
|
(51.5
|
)
|
|
|
4.2
|
|
|
|
(21.0
|
)
|
|
|
9.8
|
|
|
|
8.1
|
|
|
|
9.4
|
|
|
|
17.7
|
|
Return on total
equity(7)
|
|
|
(9.8
|
)
|
|
|
4.6
|
|
|
|
(11.5
|
)
|
|
|
8.8
|
|
|
|
7.6
|
|
|
|
8.6
|
|
|
|
15.8
|
|
Dividend payout ratio on common
stock(8)
|
|
|
N/A
|
|
|
|
163.7
|
|
|
|
N/A
|
|
|
|
63.9
|
|
|
|
56.9
|
|
|
|
34.9
|
|
|
|
15.6
|
|
Equity to assets
ratio(9)
|
|
|
2.4
|
|
|
|
3.2
|
|
|
|
3.4
|
|
|
|
3.3
|
|
|
|
3.5
|
|
|
|
3.8
|
|
|
|
4.0
|
|
Preferred stock to core capital
ratio(10)
|
|
|
38.0
|
|
|
|
20.0
|
|
|
|
37.3
|
|
|
|
17.3
|
|
|
|
13.2
|
|
|
|
13.5
|
|
|
|
14.2
|
|
|
|
(1)
|
See ITEM 2. FINANCIAL
INFORMATION SELECTED FINANCIAL DATA AND OTHER
OPERATING MEASURES in our Registration Statement for
information regarding accounting changes impacting periods prior
to January 1, 2008.
|
(2)
|
Represent the unpaid principal
balance and exclude mortgage loans and mortgage-related
securities traded, but not yet settled. Effective in December
2007, we established a trust for the administration of cash
remittances received related to the underlying assets of our PCs
and Structured Securities issued. As a result, for December 2007
and each period in 2008, we report the balance of our mortgage
portfolios to reflect the publicly-available security balances
of our PCs and Structured Securities. For periods prior to
December 2007, we report these balances based on the unpaid
principal balance of the underlying mortgage loans. We reflected
this change as an increase in the unpaid principal balance of
our retained portfolio by $2.8 billion at December 31,
2007.
|
(3)
|
The retained portfolio presented on
our consolidated balance sheets differs from the retained
portfolio in this table because the consolidated balance sheet
caption includes valuation adjustments and deferred balances.
See CONSOLIDATED BALANCE SHEETS ANALYSIS
Table 15 Characteristics of Mortgage Loans and
Mortgage-Related Securities in our Retained Portfolio for
more information.
|
(4)
|
Includes PCs and Structured
Securities that are held in our retained portfolio. See
OUR PORTFOLIOS Table 49
Freddie Macs Total Mortgage Portfolio and Segment
Portfolio Composition for the composition of our total
mortgage portfolio. Excludes Structured Securities for which we
have resecuritized our PCs and Structured Securities. These
resecuritized securities do not increase our credit-related
exposure and consist of single-class Structured Securities
backed by PCs, Real Estate Mortgage Investment Conduits, or
REMICs, and principal-only strips. The notional balances of
interest-only strips are excluded because this line item is
based on unpaid principal balance. Includes other guarantees
issued that are not in the form of a PC, such as long-term
standby commitments and credit enhancements for multifamily
housing revenue bonds.
|
(5)
|
Ratio computed as annualized net
income (loss) divided by the simple average of the beginning and
ending balances of total assets.
|
(6)
|
Ratio computed as annualized net
income (loss) available to common stockholders divided by the
simple average of the beginning and ending balances of
stockholders equity, net of preferred stock (at redemption
value).
|
(7)
|
Ratio computed as annualized net
income (loss) divided by the simple average of the beginning and
ending balances of stockholders equity.
|
(8)
|
Ratio computed as common stock
dividends declared divided by net income available to common
stockholders. Ratio is not computed for periods in which net
income (loss) available to common stockholders was a loss.
|
(9)
|
Ratio computed as the simple
average of the beginning and ending balances of
stockholders equity divided by the simple average of the
beginning and ending balances of total assets.
|
(10)
|
Ratio computed as preferred stock,
at redemption value divided by core capital. See
NOTE 9: REGULATORY CAPITAL to our consolidated
financial statements for more information regarding core capital.
|
CONSOLIDATED
RESULTS OF OPERATIONS
The following discussion of our consolidated results of
operations should be read in conjunction with our consolidated
financial statements including the accompanying notes. Also see
CRITICAL ACCOUNTING POLICIES AND ESTIMATES for more
information concerning our more significant accounting policies
and estimates applied in determining our reported financial
position and results of operations.
Table 2
Summary Consolidated Statements of Income
GAAP Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Net interest income
|
|
$
|
1,529
|
|
|
$
|
793
|
|
|
$
|
2,327
|
|
|
$
|
1,564
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income
|
|
|
757
|
|
|
|
591
|
|
|
|
1,546
|
|
|
|
1,219
|
|
Gains (losses) on guarantee asset
|
|
|
1,114
|
|
|
|
820
|
|
|
|
(280
|
)
|
|
|
297
|
|
Income on guarantee obligation
|
|
|
769
|
|
|
|
474
|
|
|
|
1,938
|
|
|
|
904
|
|
Derivative gains
(losses)(1)
|
|
|
115
|
|
|
|
318
|
|
|
|
(130
|
)
|
|
|
(206
|
)
|
Gains (losses) on investment activity
|
|
|
(3,327
|
)
|
|
|
(540
|
)
|
|
|
(2,108
|
)
|
|
|
(522
|
)
|
Unrealized gains (losses) on foreign-currency denominated debt
recorded at fair value
|
|
|
569
|
|
|
|
|
|
|
|
(816
|
)
|
|
|
|
|
Gains (losses) on debt retirement
|
|
|
(29
|
)
|
|
|
89
|
|
|
|
276
|
|
|
|
96
|
|
Recoveries on loans impaired upon purchase
|
|
|
121
|
|
|
|
72
|
|
|
|
347
|
|
|
|
107
|
|
Foreign-currency gains (losses), net
|
|
|
|
|
|
|
(333
|
)
|
|
|
|
|
|
|
(530
|
)
|
Other income
|
|
|
75
|
|
|
|
58
|
|
|
|
122
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
164
|
|
|
|
1,549
|
|
|
|
895
|
|
|
|
1,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
(3,545
|
)
|
|
|
(1,519
|
)
|
|
|
(5,648
|
)
|
|
|
(2,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax (expense) benefit
|
|
|
(1,852
|
)
|
|
|
823
|
|
|
|
(2,426
|
)
|
|
|
293
|
|
Income tax (expense) benefit
|
|
|
1,031
|
|
|
|
(94
|
)
|
|
|
1,454
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(821
|
)
|
|
$
|
729
|
|
|
$
|
(972
|
)
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes derivative gains (losses)
on foreign-currency swaps of $(48) million and
$332 million for the three months ended June 30, 2008
and 2007, respectively, and $1,189 million and
$530 million for the six months ended June 30, 2008
and 2007, respectively. Also includes derivative gains (losses)
of $(490) million and $(297) million on
foreign-currency denominated receive-fixed swaps for the three
and six months ended June 30, 2008, respectively.
|
Net
Interest Income
Table 3 presents an analysis of net interest income,
including average balances and related yields earned on assets
and incurred on liabilities.
Table 3
Net Interest Income/Yield and Average Balance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
|
(dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(3)
|
|
$
|
89,813
|
|
|
$
|
1,320
|
|
|
|
5.88
|
%
|
|
$
|
67,994
|
|
|
$
|
1,075
|
|
|
|
6.32
|
%
|
Mortgage-related securities
|
|
|
664,727
|
|
|
|
8,380
|
|
|
|
5.04
|
|
|
|
648,023
|
|
|
|
8,784
|
|
|
|
5.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retained portfolio
|
|
|
754,540
|
|
|
|
9,700
|
|
|
|
5.14
|
|
|
|
716,017
|
|
|
|
9,859
|
|
|
|
5.51
|
|
Investments(4)
|
|
|
54,061
|
|
|
|
400
|
|
|
|
2.92
|
|
|
|
49,106
|
|
|
|
634
|
|
|
|
5.11
|
|
Securities purchased under agreements to resell and federal
funds sold
|
|
|
20,660
|
|
|
|
120
|
|
|
|
2.32
|
|
|
|
24,887
|
|
|
|
332
|
|
|
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
829,261
|
|
|
|
10,220
|
|
|
|
4.93
|
|
|
|
790,010
|
|
|
|
10,825
|
|
|
|
5.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
240,119
|
|
|
|
(1,637
|
)
|
|
|
(2.70
|
)
|
|
|
172,592
|
|
|
|
(2,249
|
)
|
|
|
(5.16
|
)
|
Long-term
debt(5)
|
|
|
569,443
|
|
|
|
(6,711
|
)
|
|
|
(4.71
|
)
|
|
|
581,482
|
|
|
|
(7,331
|
)
|
|
|
(5.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
809,562
|
|
|
|
(8,348
|
)
|
|
|
(4.11
|
)
|
|
|
754,074
|
|
|
|
(9,580
|
)
|
|
|
(5.07
|
)
|
Due to PC investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,061
|
|
|
|
(121
|
)
|
|
|
(5.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
809,562
|
|
|
|
(8,348
|
)
|
|
|
(4.11
|
)
|
|
|
763,135
|
|
|
|
(9,701
|
)
|
|
|
(5.07
|
)
|
Expense related to derivatives
|
|
|
|
|
|
|
(343
|
)
|
|
|
(0.17
|
)
|
|
|
|
|
|
|
(331
|
)
|
|
|
(0.17
|
)
|
Impact of net non-interest-bearing funding
|
|
|
19,699
|
|
|
|
|
|
|
|
0.10
|
|
|
|
26,875
|
|
|
|
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding of interest-earning assets
|
|
$
|
829,261
|
|
|
|
(8,691
|
)
|
|
|
(4.18
|
)
|
|
$
|
790,010
|
|
|
|
(10,032
|
)
|
|
|
(5.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield
|
|
|
|
|
|
|
1,529
|
|
|
|
0.75
|
|
|
|
|
|
|
|
793
|
|
|
|
0.41
|
|
Fully taxable-equivalent
adjustments(6)
|
|
|
|
|
|
|
105
|
|
|
|
0.05
|
|
|
|
|
|
|
|
99
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield (fully taxable-equivalent basis)
|
|
|
|
|
|
$
|
1,634
|
|
|
|
0.80
|
|
|
|
|
|
|
$
|
892
|
|
|
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
|
(dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(3)
|
|
$
|
87,052
|
|
|
$
|
2,563
|
|
|
|
5.89
|
%
|
|
$
|
67,288
|
|
|
$
|
2,141
|
|
|
|
6.36
|
%
|
Mortgage-related securities
|
|
|
646,724
|
|
|
|
16,513
|
|
|
|
5.11
|
|
|
|
645,938
|
|
|
|
17,335
|
|
|
|
5.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retained portfolio
|
|
|
733,776
|
|
|
|
19,076
|
|
|
|
5.20
|
|
|
|
713,226
|
|
|
|
19,476
|
|
|
|
5.46
|
|
Investments(4)
|
|
|
46,758
|
|
|
|
799
|
|
|
|
3.38
|
|
|
|
48,924
|
|
|
|
1,257
|
|
|
|
5.11
|
|
Securities purchased under agreements to resell and federal
funds sold
|
|
|
17,548
|
|
|
|
241
|
|
|
|
2.74
|
|
|
|
25,684
|
|
|
|
681
|
|
|
|
5.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
798,082
|
|
|
|
20,116
|
|
|
|
5.04
|
|
|
|
787,834
|
|
|
|
21,414
|
|
|
|
5.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
222,385
|
|
|
|
(3,681
|
)
|
|
|
(3.27
|
)
|
|
|
171,921
|
|
|
|
(4,457
|
)
|
|
|
(5.16
|
)
|
Long-term
debt(5)
|
|
|
553,869
|
|
|
|
(13,436
|
)
|
|
|
(4.85
|
)
|
|
|
580,814
|
|
|
|
(14,507
|
)
|
|
|
(4.99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
776,254
|
|
|
|
(17,117
|
)
|
|
|
(4.40
|
)
|
|
|
752,735
|
|
|
|
(18,964
|
)
|
|
|
(5.03
|
)
|
Due to PC investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,364
|
|
|
|
(224
|
)
|
|
|
(5.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
776,254
|
|
|
|
(17,117
|
)
|
|
|
(4.40
|
)
|
|
|
761,099
|
|
|
|
(19,188
|
)
|
|
|
(5.03
|
)
|
Expense related to derivatives
|
|
|
|
|
|
|
(672
|
)
|
|
|
(0.17
|
)
|
|
|
|
|
|
|
(662
|
)
|
|
|
(0.17
|
)
|
Impact of net non-interest-bearing funding
|
|
|
21,828
|
|
|
|
|
|
|
|
0.12
|
|
|
|
26,735
|
|
|
|
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding of interest-earning assets
|
|
$
|
798,082
|
|
|
|
(17,789
|
)
|
|
|
(4.45
|
)
|
|
$
|
787,834
|
|
|
|
(19,850
|
)
|
|
|
(5.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield
|
|
|
|
|
|
|
2,327
|
|
|
|
0.59
|
|
|
|
|
|
|
|
1,564
|
|
|
|
0.40
|
|
Fully taxable-equivalent
adjustments(6)
|
|
|
|
|
|
|
212
|
|
|
|
0.06
|
|
|
|
|
|
|
|
194
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield (fully taxable-equivalent basis)
|
|
|
|
|
|
$
|
2,539
|
|
|
|
0.65
|
|
|
|
|
|
|
$
|
1,758
|
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes mortgage loans and
mortgage-related securities traded, but not yet settled.
|
(2)
|
For securities in our retained
portfolio and cash and investment portfolios, we calculated
average balances based on their unpaid principal balance plus
their associated deferred fees and costs (e.g., premiums
and discounts), but excluded the effect of mark-to-fair-value
changes.
|
(3)
|
Non-performing loans, where
interest income is recognized when collected, are included in
average balances.
|
(4)
|
Consist of cash and cash
equivalents and non-mortgage-related securities.
|
(5)
|
Includes current portion of
long-term debt.
|
(6)
|
The determination of net interest
income/yield (fully taxable-equivalent basis), which reflects
fully taxable-equivalent adjustments to interest income,
involves the conversion of tax-exempt sources of interest income
to the equivalent amounts of interest income that would be
necessary to derive the same net return if the investments had
been subject to income taxes using our federal statutory tax
rate of 35%.
|
Net interest income and net interest yield on a fully
taxable-equivalent basis increased during the three and six
months ended June 30, 2008 compared to the three and six
months ended June 30, 2007. During the latter half of the
first quarter of 2008 and continuing into the second quarter of
2008, liquidity concerns in the market resulted in more
favorable investment opportunities for agency mortgage-related
securities at wider spreads. In response, we increased our
purchase activities resulting in an increase in the average
balance of our interest-earning assets. The increases in net
interest income and net interest yield on a fully
taxable-equivalent basis are primarily attributable to purchases
of fixed-rate assets at significantly wider spreads relative to
our funding costs. Net interest income and net interest yield
for the three and six months ended June 30, 2008 also
benefited from funding fixed-rate assets with a higher
proportion of short-term debt in a steep yield curve environment
as well as replacing higher cost long-term debt with lower cost
issuances. Altering the mix of our debt funding between longer-
and shorter-term debt is consistent with our overall investment
management framework. As market conditions change, we can change
the mix of debt we use to fund our retained portfolio, both
floating- and fixed-rate assets. During the first and second
quarters of 2008, our short-term funding balances increased
significantly. We seek to manage interest rate risk by
attempting to substantially match the duration characteristics
of our assets and liabilities. To accomplish this, we use an
integrated strategy that involves asset and liability portfolio
management, including the use of derivatives for purposes of
rebalancing the portfolio and maintaining low PMVS and duration
gap. The increases in net interest income and net interest yield
on a fully tax-equivalent basis during the six months ended
June 30, 2008 were partially offset by the impact of
declining interest rates because our floating rate assets reset
faster than our short-term debt during the first quarter of
2008. As a result of the creation of the securitization trusts
in December of 2007, due to PC investors interest expense is now
recorded in trust management fees within other income on our
consolidated statements of income. See Non-Interest
Income Other Income for additional
information about due to PC investors interest expense.
Non-Interest
Income
Management
and Guarantee Income
Table 4 provides summary information about management and
guarantee income. Management and guarantee income consists of
contractual amounts due to us (reflecting
buy-ups and
buy-downs to base management and guarantee fees) as well as
amortization of certain pre-2003 deferred credit and buy-down
fees received by us that were recorded as deferred income as a
component of other liabilities. Post-2002 credit and buy-down
fees are reflected as increased income on guarantee obligation
as the guarantee obligation is amortized.
Table 4
Management and Guarantee
Income(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(dollars in millions, rates in basis points)
|
|
|
Contractual management and guarantee fees
|
|
$
|
778
|
|
|
|
17.5
|
|
|
$
|
629
|
|
|
|
16.1
|
|
|
$
|
1,535
|
|
|
|
17.5
|
|
|
$
|
1,227
|
|
|
|
16.0
|
|
Amortization of credit and buy-down fees included in other
liabilities
|
|
|
(21
|
)
|
|
|
(0.5
|
)
|
|
|
(38
|
)
|
|
|
(1.0
|
)
|
|
|
11
|
|
|
|
0.1
|
|
|
|
(8
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management and guarantee income
|
|
$
|
757
|
|
|
|
17.0
|
|
|
$
|
591
|
|
|
|
15.1
|
|
|
$
|
1,546
|
|
|
|
17.6
|
|
|
$
|
1,219
|
|
|
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized balance of credit and buy-down fees included in
other liabilities, at period end
|
|
$
|
403
|
|
|
|
|
|
|
$
|
451
|
|
|
|
|
|
|
$
|
403
|
|
|
|
|
|
|
$
|
451
|
|
|
|
|
|
|
|
(1)
|
Consists of management and
guarantee fees related to all issued and outstanding guarantees,
including those issued prior to adoption of Financial
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including indirect
Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB
Interpretation No. 34, or FIN 45, in January
2003, which did not require the establishment of a guarantee
asset.
|
The primary drivers affecting management and guarantee income
are the average balance of our PCs and Structured Securities and
changes in management and guarantee fee rates. Contractual
management and guarantee fees include adjustments to the
contractual rates for
buy-ups and
buy-downs, whereby the contractual management and guarantee fee
rate is adjusted for up-front cash payments we make
(buy-up) or
receive (buy-down) at guarantee issuance. Our average rates of
management and guarantee income are also affected by the mix of
products we issue, competition in market pricing and customer
preference for
buy-up and
buy-down fees. The majority of our guarantees are issued under
customer flow channel contracts, which have fixed
pricing schedules for our management and guarantee fees for
periods of up to one year. The remainder of our purchase and
guarantee securitization of mortgage loans occurs through
bulk purchasing with management and guarantee fees
negotiated on an individual transaction basis. Given the
volatility in the credit market during the three and six months
ended June 30, 2008, we will continue to closely monitor
the pricing of our management and guarantee fees as well as our
delivery fee rates and make adjustments when appropriate.
Management and guarantee income increased for the three and six
months ended June 30, 2008 compared to the three and six
months ended June 30, 2007, primarily reflecting an
increase in the average PCs and Structured Securities balances
of 14% and 15%, respectively, on an annualized basis. The
average contractual management and guarantee fee rate for the
three and six months ended June 30, 2008 was higher than
the three and six months ended June 30, 2007, primarily due
to an increase in
buy-up
activity as well as the impact of higher management and
guarantee fees on purchases of mortgage loans, including
interest-only loans, guaranteed in the last half of 2007 that
remain in the portfolio. Our management and guarantee fee rates
are generally higher on nontraditional loans, such as
interest-only mortgages, than our fee rates for fixed-rate
mortgages. We experienced a significant decrease in purchase
volume through bulk channels as well as declines in the
composition of non-traditional loans underlying our newly-issued
guarantees during the six months ended June 30, 2008.
Gains
(Losses) on Guarantee Asset
Upon issuance of a guarantee of securitized assets, we record a
guarantee asset on our consolidated balance sheets representing
the fair value of the management and guarantee fees we expect to
receive over the life of our PCs or Structured Securities.
Guarantee assets are recognized in connection with transfers of
PCs and Structured Securities that are accounted for as sales
under SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities,
a replacement of Financial Accounting Standards Board, or FASB,
Statement No. 125. Additionally, we recognize
guarantee assets for PCs issued through our guarantor swap
program and for certain Structured Transactions that we issue to
third parties in exchange for non-agency mortgage-related
securities. Subsequent changes in the fair value of the future
cash flows of our guarantee asset are reported in the current
period income as gains (losses) on guarantee asset.
The change in fair value of our guarantee asset reflects:
|
|
|
|
|
reductions related to the management and guarantee fees received
that are considered a return of our recorded investment in our
guarantee asset; and
|
|
|
|
changes in the fair value of management and guarantee fees we
expect to receive over the life of the related PC or Structured
Security.
|
The fair value of future management and guarantee fees is driven
primarily by expected changes in interest rates that affect the
estimated life of mortgages underlying our PCs and Structured
Securities and related discount rates used to determine the net
present value of the cash flows. For example, an increase in
interest rates generally slows the rate of prepayments and
extends the life of our guarantee asset and increases the fair
value of future management and guarantee fees. Our valuation
methodology for our guarantee asset uses market-based
information, including market values of interest-only
securities, to determine the fair value of future cash flows
associated with our guarantee asset.
Table 5
Attribution of Change Gains (Losses) on Guarantee
Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Contractual management and guarantee fees
|
|
$
|
(720
|
)
|
|
$
|
(553
|
)
|
|
$
|
(1,409
|
)
|
|
$
|
(1,076
|
)
|
Portion related to imputed interest income
|
|
|
243
|
|
|
|
130
|
|
|
|
458
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of investment on guarantee asset
|
|
|
(477
|
)
|
|
|
(423
|
)
|
|
|
(951
|
)
|
|
|
(819
|
)
|
Change in fair value of management and guarantee fees
|
|
|
1,591
|
|
|
|
1,243
|
|
|
|
671
|
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on guarantee asset
|
|
$
|
1,114
|
|
|
$
|
820
|
|
|
$
|
(280
|
)
|
|
$
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual management and guarantee fees represent cash
received in the current period related to our PCs and Structured
Securities with an established guarantee asset. A portion of
these cash receipts is attributed to imputed interest income on
our guarantee asset. Contractual management and guarantee fees
increased for the three and six months ended June 30, 2008
compared to the three and six months ended June 30, 2007,
respectively, primarily due to increases in the average balance
of our PCs and Structured Securities issued.
The increases in the fair values of management and guarantee
fees for the three and six months ended June 30, 2008 and
2007 were primarily driven by higher market valuations for
interest-only mortgage securities, used to value our guarantee
asset resulting from increases in interest rates during these
periods. The fair value change during the second quarter of
2008, as compared to the second quarter of 2007, was higher due
to a larger increase in interest rates combined with higher
average balances during the second quarter of 2008. The
increases in the fair values of management and guarantee fees
were less significant during the six months ended June 30,
2008, compared to the six months ended June 30, 2007 due to
a larger increase in interest rates during the 2007 period than
during the 2008 period.
Income
on Guarantee Obligation
Upon issuance of our guarantee, we record a guarantee obligation
on our consolidated balance sheets representing the fair value
of our obligation to perform under the terms of the guarantee.
Our guarantee obligation primarily represents our performance
and other related costs, which consist of estimated credit
costs, including estimated unrecoverable principal and interest
that will be incurred over the expected life of the underlying
mortgages backing PCs, estimated foreclosure-related costs, and
estimated administrative and other costs related to our
guarantee. Our guarantee obligation is amortized into income
using a static effective yield determined at inception of the
guarantee based on forecasted repayments of the principal
balances. The static effective yield is periodically evaluated
and adjusted when significant changes in economic events cause a
shift in the pattern of our economic release from risk. For
example, certain market environments may lead to sharp and
sustained changes in home prices or prepayment rates of
mortgages, leading to the need for an adjustment in the static
effective yield for specific mortgage pools underlying the
guarantee. When a change is required, a cumulative
catch-up
adjustment, which could be significant in a given period, will
be recognized and a new static effective yield will be used to
determine our guarantee obligation amortization.
Effective January 1, 2008, we began estimating the fair
value of our newly-issued guarantee obligations at their
inception using the practical expedient provided by FIN 45,
as amended by SFAS 157. Using this approach, the initial
guarantee obligation is recorded at an amount equal to the fair
value of the compensation received in the related guarantee
transactions, including upfront delivery and other fees. As a
result, we no longer record estimates of deferred gains or
immediate day one losses on most guarantees. All
unamortized amounts recorded prior to January 1, 2008 will
continue to be deferred and amortized using existing
amortization methods. This change had a significant positive
impact on our financial results for the three and six months
ended June 30, 2008.
Table 6 provides information about the components of income
on guarantee obligation.
Table 6
Income on Guarantee Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Amortization income related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Static effective yield
|
|
$
|
681
|
|
|
$
|
414
|
|
|
$
|
1,261
|
|
|
$
|
791
|
|
Cumulative
catch-up
|
|
|
88
|
|
|
|
60
|
|
|
|
677
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income on guarantee obligation
|
|
$
|
769
|
|
|
$
|
474
|
|
|
$
|
1,938
|
|
|
$
|
904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization income increased for the three and six months ended
June 30, 2008, compared to the three and six months ended
June 30, 2007. This increase is due to (1) higher
guarantee obligation balances recognized in 2007 as a result of
significant market risk premiums, including those that resulted
in significant day one losses (i.e., where the fair value
of the guarantee obligation at issuance exceeded the fair value
of the guarantee and credit enhancement-related assets),
(2) higher cumulative
catch-up
adjustments for the three and six months ended June 30,
2008 and (3) higher average balances of our
PCs and Structured Securities. The cumulative
catch-up
adjustments recognized during the six months ended June 30,
2008 were principally due to significant declines in home prices
and, to a lesser extent, increases in mortgage prepayment speeds
related to pools of mortgage loans issued during 2006 and 2007.
These cumulative
catch-up
adjustments are recorded to provide a pattern of revenue
recognition that is consistent with our economic release from
risk and better aligns with the timing of the recognition of
losses on the pools of mortgage loans we guarantee.
Derivative
Overview
Table 7 presents the effect of derivatives on our
consolidated financial statements, including notional or
contractual amounts of our derivatives and our hedge accounting
classifications.
Table 7
Summary of the Effect of Derivatives on Selected Consolidated
Financial Statement Captions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Notional
|
|
|
Fair Value
|
|
|
AOCI
|
|
|
Notional
|
|
|
Fair Value
|
|
|
AOCI
|
|
Description
|
|
Amount(1)
|
|
|
(Pre-Tax)(2)
|
|
|
(Net of
Taxes)(3)
|
|
|
Amount(1)
|
|
|
(Pre-Tax)(2)
|
|
|
(Net of
Taxes)(3)
|
|
|
|
(in millions)
|
|
|
Cash flow hedges open
|
|
$
|
15,200
|
|
|
$
|
345
|
|
|
$
|
221
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
No hedge designation
|
|
|
1,289,827
|
|
|
|
6,340
|
|
|
|
|
|
|
|
1,322,881
|
|
|
|
4,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,305,027
|
|
|
|
6,685
|
|
|
|
221
|
|
|
|
1,322,881
|
|
|
|
4,790
|
|
|
|
|
|
Balance related to closed cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
(3,639
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,305,027
|
|
|
|
6,685
|
|
|
|
(3,418
|
)
|
|
|
1,322,881
|
|
|
|
4,790
|
|
|
|
(4,059
|
)
|
Derivative interest receivable (payable), net
|
|
|
|
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
|
1,659
|
|
|
|
|
|
Trade/settle receivable (payable), net
|
|
|
|
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative collateral (held) posted, net
|
|
|
|
|
|
|
(8,067
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,305,027
|
|
|
$
|
(469
|
)
|
|
$
|
(3,418
|
)
|
|
$
|
1,322,881
|
|
|
$
|
245
|
|
|
$
|
(4,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Derivative
|
|
|
Hedge
|
|
|
Derivative
|
|
|
Hedge
|
|
|
Derivative
|
|
|
Hedge
|
|
|
Derivative
|
|
|
Hedge
|
|
|
|
Gains
|
|
|
Accounting
|
|
|
Gains
|
|
|
Accounting
|
|
|
Gains
|
|
|
Accounting
|
|
|
Gains
|
|
|
Accounting
|
|
Description
|
|
(Losses)
|
|
|
Gains
(Losses)(4)
|
|
|
(Losses)
|
|
|
Gains
(Losses)(4)
|
|
|
(Losses)
|
|
|
Gains
(Losses)(4)
|
|
|
(Losses)
|
|
|
Gains
(Losses)(4)
|
|
|
|
(in millions)
|
|
|
Cash flow hedges
open(5)
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
|
|
No hedge designation
|
|
|
115
|
|
|
|
|
|
|
|
318
|
|
|
|
|
|
|
|
(130
|
)
|
|
|
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
115
|
|
|
$
|
7
|
|
|
$
|
318
|
|
|
$
|
|
|
|
$
|
(130
|
)
|
|
$
|
4
|
|
|
$
|
(206
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Notional or contractual amounts are
used to calculate the periodic settlement amounts to be received
or paid and generally do not represent actual amounts to be
exchanged. Notional or contractual amounts are not recorded as
assets or liabilities on our consolidated balance sheets.
|
(2)
|
The value of derivatives on our
consolidated balance sheets is reported as derivative assets,
net and derivative liability, net, and includes derivative
interest receivable or (payable), net, trade/settle receivable
or (payable), net and derivative cash collateral (held) or
posted, net.
|
(3)
|
Derivatives that meet specific
criteria may be accounted for as cash flow hedges. Changes in
the fair value of the effective portion of open qualifying cash
flow hedges are recorded in AOCI, or accumulated other
comprehensive income, net of taxes. Net deferred gains and
losses on closed cash flow hedges (i.e., where the
derivative is either terminated or redesignated) are also
included in AOCI, net of taxes, until the related forecasted
transaction affects earnings or is determined to be probable of
not occurring.
|
(4)
|
Hedge accounting gains (losses)
arise when the fair value change of a derivative does not
exactly offset the fair value change of the hedged item
attributable to the hedged risk, and is a component of other
income in our consolidated statements of income. For further
information, see NOTE 10: DERIVATIVES to our
consolidated financial statements.
|
(5)
|
For all derivatives in qualifying
hedge accounting relationships, the accrual of periodic cash
settlements is recorded in net interest income on our
consolidated statements of income and those amounts are not
included in the table. For derivatives not in qualifying hedge
accounting relationships, the accrual of periodic cash
settlements is recorded in derivative gains (losses) on our
consolidated statements of income.
|
Beginning in the first quarter of 2008, we began designating
certain derivative positions as cash flow hedges of changes in
cash flows associated with our forecasted issuances of debt
consistent with our risk management goals. In the periods
presented prior to 2008, we only elected cash flow hedge
accounting relationships for certain commitments to sell
mortgage-related securities. We expect this expanded hedge
accounting strategy will reduce volatility in our consolidated
statements of income going forward. For a derivative accounted
for as a cash flow hedge, changes in fair value are reported in
AOCI, net of taxes, on our consolidated balance sheets to the
extent the hedge is effective. The ineffective portion of
changes in fair value is reported as other income on our
consolidated statements of income. We record changes in the fair
value, including periodic settlements, of derivatives not in
hedge accounting relationships as derivative gains (losses) on
our consolidated statements of income. See NOTE 10:
DERIVATIVES to our consolidated financial statements for
additional information about our derivatives designated as cash
flow hedges.
Derivative
Gains (Losses)
Table 8 provides a summary of the notional or contractual
amounts and the gains and losses related to derivatives that
were not accounted for in hedge accounting relationships.
Derivative gains (losses) represents the change in fair value of
derivatives not accounted for in hedge accounting relationships
because the derivatives did not qualify for, or we did not elect
to pursue, hedge accounting, resulting in fair value changes
being recorded to earnings. Derivative gains (losses) also
includes the accrual of periodic settlements for derivatives
that are not in hedge accounting relationships. Although
derivatives are an important aspect of our management of
interest-rate risk, they will generally increase the volatility
of reported net income (loss), particularly when they are not
accounted for in hedge accounting relationships.
Table 8
Derivatives Not in Hedge Accounting Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Amount
|
|
|
Derivative Gains (Losses)
|
|
|
|
June 30,
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Call swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
$
|
213,897
|
|
|
$
|
236,752
|
|
|
$
|
(2,542
|
)
|
|
$
|
(1,168
|
)
|
|
$
|
698
|
|
|
$
|
(1,721
|
)
|
Written
|
|
|
1,500
|
|
|
|
3,400
|
|
|
|
27
|
|
|
|
48
|
|
|
|
21
|
|
|
|
50
|
|
Put swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
21,175
|
|
|
|
19,325
|
|
|
|
72
|
|
|
|
244
|
|
|
|
(53
|
)
|
|
|
236
|
|
Written
|
|
|
38,150
|
|
|
|
2,600
|
|
|
|
(93
|
)
|
|
|
(144
|
)
|
|
|
(90
|
)
|
|
|
(146
|
)
|
Receive-fixed swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign-currency denominated
|
|
|
14,993
|
|
|
|
21,050
|
|
|
|
(490
|
)
|
|
|
(394
|
)
|
|
|
(297
|
)
|
|
|
(500
|
)
|
U.S. dollar denominated
|
|
|
230,061
|
|
|
|
193,607
|
|
|
|
(7,204
|
)
|
|
|
(3,106
|
)
|
|
|
2,299
|
|
|
|
(2,741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receive-fixed swaps
|
|
|
245,054
|
|
|
|
214,657
|
|
|
|
(7,694
|
)
|
|
|
(3,500
|
)
|
|
|
2,002
|
|
|
|
(3,241
|
)
|
Pay-fixed swaps
|
|
|
395,874
|
|
|
|
284,927
|
|
|
|
11,259
|
|
|
|
4,531
|
|
|
|
(3,874
|
)
|
|
|
4,053
|
|
Futures
|
|
|
147,291
|
|
|
|
113,000
|
|
|
|
(154
|
)
|
|
|
(70
|
)
|
|
|
493
|
|
|
|
(51
|
)
|
Foreign-currency
swaps(1)
|
|
|
15,353
|
|
|
|
22,709
|
|
|
|
(48
|
)
|
|
|
332
|
|
|
|
1,189
|
|
|
|
530
|
|
Forward purchase and sale commitments
|
|
|
63,512
|
|
|
|
54,783
|
|
|
|
(243
|
)
|
|
|
(66
|
)
|
|
|
268
|
|
|
|
(71
|
)
|
Other(2)
|
|
|
148,021
|
|
|
|
35,719
|
|
|
|
(102
|
)
|
|
|
17
|
|
|
|
(72
|
)
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,289,827
|
|
|
|
987,872
|
|
|
|
482
|
|
|
|
224
|
|
|
|
582
|
|
|
|
(339
|
)
|
Accrual of periodic settlements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-fixed
swaps(3)
|
|
|
|
|
|
|
|
|
|
|
648
|
|
|
|
(37
|
)
|
|
|
721
|
|
|
|
(95
|
)
|
Pay-fixed swaps
|
|
|
|
|
|
|
|
|
|
|
(1,118
|
)
|
|
|
155
|
|
|
|
(1,595
|
)
|
|
|
303
|
|
Foreign-currency swaps
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
(25
|
)
|
|
|
158
|
|
|
|
(77
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrual of periodic settlements
|
|
|
|
|
|
|
|
|
|
|
(367
|
)
|
|
|
94
|
|
|
|
(712
|
)
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,289,827
|
|
|
$
|
987,872
|
|
|
$
|
115
|
|
|
$
|
318
|
|
|
$
|
(130
|
)
|
|
$
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Foreign-currency swaps are defined
as swaps in which the net settlement is based on one leg
calculated in a foreign-currency and the other leg calculated in
U.S. dollars.
|
(2)
|
Consists of basis swaps, certain
option-based contracts (including written options),
interest-rate caps, swap guarantee derivatives and credit
derivatives.
|
(3)
|
Includes imputed interest on
zero-coupon swaps.
|
We use receive- and pay-fixed swaps to adjust the interest-rate
characteristics of our debt funding in order to more closely
match changes in the interest-rate characteristics of our
mortgage-related assets. During the second quarter of 2008, fair
value gains on our pay-fixed swaps of $11.3 billion
contributed to an overall gain recorded for derivatives. The
gains were partially offset by losses on our receive-fixed swaps
of $7.7 billion as swap interest rates increased.
Additionally, we use swaptions and other option-based
derivatives to adjust the characteristics of our debt in
response to changes in the expected lives of mortgage-related
assets in our retained portfolio. The losses on our purchased
call swaptions, which increased during the second quarter of
2008, compared to the second quarter of 2007, were primarily
attributable to increasing swap interest rates, partially offset
by an increase in implied volatility during the second quarter
of 2008.
During the six months ended June 30, 2008, we recognized a
smaller derivative loss as compared to the six months ended
June 30, 2007. On a
year-to-date
basis for 2008, the shorter term swap interest rates declined
resulting in a loss on our pay-fixed swap positions, partially
offset by gains on our receive-fixed swaps. The decrease in
shorter term swap interest rates on a
year-to-date
basis for 2008, combined with an increase in volatility resulted
in a gain related to our purchased call swaptions for the six
months ended June 30, 2008.
Effective January 1, 2008, we elected the fair value option
for our foreign-currency denominated debt. As a result of this
election, foreign-currency translation gains and losses and fair
value adjustments related to our foreign-currency denominated
debt are recognized on our consolidated statements of income as
unrealized gains (losses) on foreign-currency denominated debt
recorded at fair value. Prior to January 1, 2008,
translation gains and losses on our foreign-currency denominated
debt were recorded in foreign-currency gains (losses), net and
changes in value related to market movements were not
recognized. We use a combination of foreign-currency swaps and
foreign-currency denominated receive-fixed swaps to hedge the
changes in fair value of our foreign-currency denominated debt
related to fluctuations in exchange rates and interest rates,
respectively. Derivative gains (losses) on foreign-currency
swaps were $(48) million and $1.2 billion for the
three and six months ended June 30, 2008, respectively,
compared to $332 million and $530 million for the
three and six months ended June 30, 2007, respectively.
These amounts were offset by fair value gains (losses) related
to translation of $88 million and $(1.1) billion for
the three and six months ended June 30, 2008, respectively,
and $(333) million and $(530) million for the three
and six months ended June 30, 2007, respectively, on our
foreign-currency denominated debt. In addition, the
interest-rate component of the derivative losses of
$490 million and $297 million for the three and six
months
ended June 30, 2008, respectively, on foreign-currency
denominated receive-fixed swaps largely offset market value
adjustments gains included in unrealized gains (losses) on
foreign-currency denominated debt recorded at fair value of
$481 million and $310 million for the three and six
months ended June 30, 2008, respectively. See
Unrealized Gains (Losses) on Foreign-Currency
Denominated Debt Recorded at Fair Value and
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES to our consolidated financial statements for
additional information about our election to adopt the fair
value option for foreign-currency denominated debt. See
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 11: DERIVATIVES
in our Registration Statement for additional information about
our derivatives.
Gains
(Losses) on Investment Activity
Gains (losses) on investment activity includes gains and losses
on certain assets where changes in fair value are recognized
through earnings, gains and losses related to sales, impairments
and other valuation adjustments. Table 9 summarizes the
components of gains (losses) on investment activity.
Table 9
Gains (Losses) on Investment Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Gains (losses) on trading
securities(1)
|
|
$
|
(2,279
|
)
|
|
$
|
20
|
|
|
$
|
(1,308
|
)
|
|
$
|
45
|
|
Gains (losses) on sale of mortgage
loans(2)
|
|
|
(5
|
)
|
|
|
3
|
|
|
|
66
|
|
|
|
20
|
|
Gains (losses) on sale of available-for-sale securities
|
|
|
38
|
|
|
|
(249
|
)
|
|
|
253
|
|
|
|
(215
|
)
|
Security impairments on available-for-sale securities
|
|
|
(1,040
|
)
|
|
|
(294
|
)
|
|
|
(1,111
|
)
|
|
|
(350
|
)
|
Lower-of-cost-or-fair-value adjustments
|
|
|
(41
|
)
|
|
|
(20
|
)
|
|
|
(8
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) on investment activity
|
|
$
|
(3,327
|
)
|
|
$
|
(540
|
)
|
|
$
|
(2,108
|
)
|
|
$
|
(522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
mark-to-fair
value adjustments recorded in accordance with Emerging Issues
Task Force, or EITF,
99-20,
Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial
Assets on securities classified as trading of
$(7) million and $(2) million for the three months
ended June 30, 2008 and 2007, respectively and
$(327) million and $(3) million for the six months
ended June 30, 2008 and 2007, respectively. Prior period
amounts have been revised to conform to the current period
presentation.
|
|
(2)
|
Represent gains (losses) on
mortgage loans sold in connection with securitization
transactions.
|
Gains
(Losses) on Trading Securities
We recognized net losses on trading securities for the three and
six months ended June 30, 2008, as compared to net
gains for the three and six months ended June 30,
2007. On January 1, 2008, we implemented fair value option
accounting and transferred approximately $90 billion in
securities, primarily ARMs and fixed-rate PCs, from
available-for-sale securities to trading securities
significantly increasing our securities classified as trading.
The unpaid principal balance of our securities classified as
trading was approximately $157 billion at June 30,
2008 compared to approximately $12 billion at
December 31, 2007. The increased balance in our trading
portfolio together with an increase in interest rates
contributed to losses on trading securities of $2.3 billion
and $1.3 billion for the three and six months ended
June 30, 2008, respectively. These losses were partially
offset by gains on our interest-only securities.
Gains
(Losses) on Sale of Available-For-Sale Securities
We recognized net gains on the sale of available-for-sale
securities for the second quarter of 2008, as compared to net
losses during the second quarter of 2007. During the second
quarter of 2008, we sold $1.2 billion of seasoned
securities, primarily consisting of obligations of states and
political subdivisions, which generated a net gain of
$47 million. During the second quarter of 2007, we entered
into structuring transactions and sales of seasoned securities
with unpaid principal balances of $21.4 billion generating
net losses recognized in gains (losses) on investment activity
because the securities sold had lower coupon rates than those
available in the market at the time of sale.
We recognized net gains on the sale of available-for-sale
securities for the six months ended June 30, 2008, as
compared to net losses for the six months ended June 30,
2007. During the six months ended June 30, 2008, we entered
into structuring transactions and sales of seasoned securities
with unpaid principal balances of $20 billion, primarily
consisting of PCs and Structured Securities, which generated a
net gain of $201 million. These sales occurred principally
during the earlier months of the first quarter of 2008 when
market conditions were favorable and were driven in part by our
need to maintain our mandatory target capital surplus. We were
not required to sell these securities. However, in an effort to
improve our capital position in light of the unanticipated
extraordinary market conditions that began in the latter half of
2007, we strategically selected blocks of securities to sell,
the majority of which were in a gain position. These sales
reduced the assets on our balance sheet against which we are
required to hold capital. In addition, the net gains on these
sales increased our retained earnings, further improving our
capital position. During the six months ended June 30,
2007, we sold $31.1 billion of PCs and Structured
Securities, which generated a net loss of $132 million.
Security
Impairments on Available-For-Sale Securities
During the second quarter of 2008 and 2007, we recorded
other-than-temporary impairments related to investments in
available-for-sale securities of $1.0 billion and
$294 million, respectively. Of the impairments recognized
during the second quarter of 2008, $826 million related to
non-agency securities backed by subprime or
Alt-A and
other loans, primarily due to recent deterioration in the
performance of the collateral underlying these securities. The
primary contributors to the deteriorating performance were
negative delinquency trends that continued, and in several cases
accelerated. Our securities backed by second lien subprime loans
suffered a pronounced decline in credit enhancement levels. Also
contributing to these impairments were credit enhancements
related to monoline bond insurance provided by one monoline on
individual securities in an unrealized loss position where we
have determined that it is both probable a principal and
interest shortfall will occur on the insured securities and that
in such a case there is substantial uncertainty surrounding the
insurers ability to pay all future claims. In making this
determination we considered additional qualitative factors, such
as the monolines availability of capital, ability to
generate new business, pending regulatory actions, ratings
agency actions, security prices, credit default swap levels
traded on the insurer and our own cash flow analysis. We also
recognized impairment charges of $214 million related to
our short-term available-for-sale non-mortgage-related
securities with $8.9 billion of unpaid principal balance,
as management could no longer assert the positive intent to hold
these securities to recovery. The decision to impair these
securities is consistent with our consideration of sales of
securities from the cash and investments portfolio as a
contingent source of liquidity. During the three months ended
June 30, 2007, security impairments on available-for-sale
securities included $291 million in mortgage-related
securities impairments attributed to agency mortgage-related
securities in an unrealized loss position that we did not have
the intent to hold to a forecasted recovery. Of these
$291 million of impairments, $279 million related to
securities where the duration of the unrealized loss prior to
impairment was greater than 12 months.
During the six months ended June 30, 2008 and 2007, we
recorded impairments related to investments in
available-for-sale securities of $1.1 billion and
$350 million, respectively. Of the impairments recognized
during the six months ended June 30, 2008,
$826 million related to non-agency securities backed by
subprime or Alt-A and other loans as discussed above. Of the
remaining $285 million, the majority, $214 million,
related to impairments of our available-for-sale
non-mortgage-related securities during the three months ended
June 30, 2008 where we did not have the intent to hold to a
forecasted recovery. During the six months ended June 30,
2007, security impairments on available-for-sale securities
included $347 million in impairments attributed to agency
mortgage-related securities in an unrealized loss position that
we did not have the intent to hold to a forecasted recovery.
Unrealized
Gains (Losses) on Foreign-Currency Denominated Debt Recorded at
Fair Value
We elected the fair value option for our foreign-currency
denominated debt effective January 1, 2008. Accordingly,
foreign-currency exposure is now a component of unrealized gains
(losses) on foreign-currency denominated debt recorded at fair
value. Prior to that date, translation gains and losses on our
foreign-currency denominated debt were reported in
foreign-currency gains (losses), net in our consolidated
statements of income. We manage the foreign-currency exposure
associated with our foreign-currency denominated debt through
the use of derivatives. For the three months ended June 30,
2008, we recognized fair value gains of $569 million on our
foreign-currency denominated debt primarily due to an increase
in interest rates and the U.S. dollar strengthening relative to
the Euro. However, the U.S. dollar weakened relative to the Euro
during the six months ended June 30, 2008, contributing to
our recognition of fair value losses of $816 million on our
foreign-currency denominated debt. See Derivative Gains
(Losses) for additional information about how we
mitigate changes in the fair value of our foreign-currency
denominated debt by using derivatives. See
Foreign-Currency Gains (Losses), Net and
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES to our consolidated financial statements for
additional information about our adoption of SFAS 159.
Gains
(Losses) on Debt Retirements
Gains (losses) on debt retirement were $(29) million and
$276 million during the three and six months ended
June 30, 2008, respectively, compared to gains of
$89 million and $96 million during the three and six
months ended June 30, 2007, respectively. During the six
months ended June 30, 2008, we recognized gains due to the
increased level of call activity, primarily involving our debt
with coupon levels that increase at pre-determined intervals,
which led to gains upon retirement and write-offs of previously
recorded interest expense during the first quarter of 2008.
Recoveries
on Loans Impaired upon Purchase
Recoveries on loans impaired upon purchase represent the
recapture into income of previously recognized losses on loans
purchased and provision for credit losses associated with
purchases of delinquent loans from our PCs and Structured
Securities in conjunction with our guarantee activities.
Recoveries occur when a non-performing loan is repaid in full or
when at the time of foreclosure the estimated fair value of the
acquired property, less costs to sell, exceeds the carrying
value of the loan. For impaired loans where the borrower has
made required payments that return the loan to less than
90 days delinquent, the recovery amounts are instead
accreted into interest income over time as periodic payments are
received.
During the three months ended June 30, 2008 and 2007, we
recognized recoveries on loans impaired upon purchase of
$121 million and $72 million, respectively. During the
six months ended June 30, 2008 and 2007, we recognized
recoveries on loans impaired upon purchase of $347 million
and $107 million, respectively. The volume and magnitude of
recoveries were greater during the three and six months ended
June 30, 2008 than during the three and six months ended
June 30, 2007, since the initial losses on impaired loans
purchased during 2007 were principally based on market
valuations that were more severe in the last half of 2007 due to
liquidity and mortgage credit concerns. In addition, our
purchases of impaired loans were greater during 2007 than in
2008 due to our change in practice in December 2007 to delay our
optional repurchase of delinquent loans underlying our PCs.
Foreign-Currency
Gains (Losses), Net
We manage the foreign-currency exposure associated with our
foreign-currency denominated debt through the use of
derivatives. We elected the fair value option for
foreign-currency denominated debt effective January 1,
2008. Prior to this election, gains and losses associated with
the foreign-currency exposure of our foreign-currency
denominated debt were recorded as foreign-currency gains
(losses), net in our consolidated statements of income. With the
adoption of SFAS 159, foreign-currency exposure is now a
component of unrealized gains (losses) on foreign-currency
denominated debt recorded at fair value. Because the fair value
option is prospective, prior period amounts have not been
reclassified. See Derivative Gains (Losses)
and Unrealized Gains (Losses) on Foreign-Currency
Denominated Debt Recorded at Fair Value and
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES to our consolidated financial statements for
additional information.
For the three and six months ended June 30, 2007, we
recognized net foreign-currency translation losses primarily
related to our foreign-currency denominated debt of
$333 million and $530 million, respectively, as the
U.S. dollar weakened relative to the Euro during the
period. During the same period, these losses were offset by an
increase of $332 million and $530 million,
respectively, in the fair value of foreign-currency-related
derivatives recorded in derivative gains (losses).
Other
Income
Other income primarily consists of resecuritization fees, trust
management income, fees associated with servicing and
technology-related products, including Loan
Prospector®,
fees related to multifamily loans (including application and
other fees) and various other fees received from mortgage
originators and servicers. Resecuritization fees are revenues we
earn primarily in connection with the issuance of Structured
Securities for which we make a REMIC election, where the
underlying collateral is provided by third parties. These fees
are also generated in connection with the creation of
interest-only and principal-only strips as well as other
Structured Securities. Trust management fees represent the fees
we earn as administrator, issuer and trustee, net of related
expenses, which prior to December 2007, was reported as due to
PC investors, a component of net interest income.
Non-Interest
Expense
Table 10 summarizes the components of non-interest expense.
Table 10
Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
241
|
|
|
$
|
227
|
|
|
$
|
472
|
|
|
$
|
440
|
|
Professional services
|
|
|
55
|
|
|
|
104
|
|
|
|
127
|
|
|
|
193
|
|
Occupancy expense
|
|
|
18
|
|
|
|
16
|
|
|
|
33
|
|
|
|
30
|
|
Other administrative expenses
|
|
|
90
|
|
|
|
95
|
|
|
|
169
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
404
|
|
|
|
442
|
|
|
|
801
|
|
|
|
845
|
|
Provision for credit losses
|
|
|
2,537
|
|
|
|
447
|
|
|
|
3,777
|
|
|
|
695
|
|
REO operations expense
|
|
|
265
|
|
|
|
16
|
|
|
|
473
|
|
|
|
30
|
|
Losses on certain credit guarantees
|
|
|
|
|
|
|
150
|
|
|
|
15
|
|
|
|
327
|
|
Losses on loans purchased
|
|
|
120
|
|
|
|
264
|
|
|
|
171
|
|
|
|
480
|
|
LIHTC partnerships
|
|
|
108
|
|
|
|
135
|
|
|
|
225
|
|
|
|
243
|
|
Minority interests in earnings of consolidated subsidiaries
|
|
|
5
|
|
|
|
9
|
|
|
|
8
|
|
|
|
18
|
|
Other expenses
|
|
|
106
|
|
|
|
56
|
|
|
|
178
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
3,545
|
|
|
$
|
1,519
|
|
|
$
|
5,648
|
|
|
$
|
2,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
Expenses
Administrative expenses decreased slightly for the three and six
months ended June 30, 2008, compared to the three and six
months ended June 30, 2007, primarily due to a reduction in
our use of consultants. As a percentage of the average total
mortgage portfolio, administrative expenses declined to
7.4 basis points and 7.5 basis points for the three
and six months ended June 30, 2008, respectively, from
9.2 basis points and 8.9 basis points for the three
and six months ended June 30, 2007, respectively.
Provision
for Credit Losses
Our credit loss reserves reflect our best estimates of incurred
losses. Our reserve estimate includes projections related to
strategic loss mitigation initiatives, including a higher rate
of loan modifications for troubled borrowers, and projections of
recoveries through repurchases by seller/servicers of defaulted
loans due to failure to follow contractual underwriting
requirements at the time of the loan origination. Our reserve
estimate also reflects our best projection of defaults. However,
the unprecedented deterioration in the national housing market
and the uncertainty in other macroeconomic factors makes
forecasting of default rates increasingly imprecise. These
estimates require significant judgments and other parties could
arrive at different conclusions as to the likelihood of various
defaults and severity outcomes. The inability to realize the
anticipated benefits of our loss mitigation plans, a lower
realized rate of seller/servicer repurchases or default rates
and severity that exceed our current projections would cause our
losses to be significantly higher than those currently
estimated. Although significant flooding occurred in certain
states in the midwestern U.S. during the second quarter of 2008,
we do not believe this had a significant impact on our mortgage
portfolio and it did not have a meaningful impact on our
estimates of incurred loss as of June 30, 2008.
The provision for credit losses increased for the three and six
months ended June 30, 2008, compared to the three and six
months ended June 30, 2007, respectively, as continued
weakening in the housing market affected our single-family
portfolio. For the three and six months ended June 30,
2008, we recorded additional reserves for credit losses on our
single-family portfolio as a result of:
|
|
|
|
|
increased estimates of incurred losses on mortgage loans that
are expected to experience higher default rates based on their
year of origination, particularly those originated during 2006
and 2007 and also based on product-type, particularly
Alt-A and
interest-only mortgage products;
|
|
|
|
an observed increase in delinquency rates and the percentage of
loans that transition from delinquency to foreclosure; and
|
|
|
|
increases in the estimated severity of losses on a per-property
basis, driven in part by declines in home sales and home prices.
The states with the largest declines in home prices and highest
increases in severity of losses include California, Florida,
Nevada, Arizona, Virginia, Maryland and Michigan.
|
We expect our provisions for credit losses to remain high for
the remainder of 2008 and the extent and duration of high credit
costs in future periods will depend on a number of factors,
including changes in property values, regional economic
conditions, third-party mortgage insurance coverage and
recoveries and the realized rate of seller/servicer repurchases.
We may further increase our single-family loan loss reserves in
future periods as additional losses are incurred, particularly
related to mortgages originated in 2006 and 2007. Loans we
purchased during 2006 and 2007 represent 36% of the unpaid
principal balance of our single-family credit guarantee
portfolio and approximately 16% of the unpaid principal balance
of single-family loans that we hold in our retained portfolio.
There is a significant lag in time from the implementation of
loss mitigation activities and the final resolution of
delinquent mortgage loans as well as the disposition of
nonperforming assets. As indicated by the significant increase
in our loan loss reserve during the second quarter of 2008, we
expect our charge-offs will continue to increase in the
remainder of 2008.
REO
Operations Expense
The increase in REO operations expense for the three and six
months ended June 30, 2008, as compared to the three and
six months ended June 30, 2007, was due to increases in the
number of single-family property additions to our REO balance of
148% and 132%, respectively, as well as declining single-family
REO property values. The decline in home prices, which has been
both rapid and dramatic in certain geographical areas, combined
with our higher REO inventory balance, resulted in an increase
in the market-based writedowns of REO, which totaled
$118 million and $232 million for the three and six
months ended June 30, 2008, respectively. REO expense also
increased due to higher real estate taxes, maintenance costs and
net losses on sales experienced during the three and six months
ended June 30, 2008 as compared to the three and six months
ended June 30, 2007. We expect REO operations expense to
continue to increase in the remainder of 2008, as single-family
REO volume increases and home prices decline.
Losses
on Certain Credit Guarantees
Losses on certain credit guarantees consist of losses recognized
upon the issuance of PCs in guarantor swap transactions. Prior
to January 1, 2008, our recognition of losses on certain
guarantee contracts occurred due to any one or a combination of
several factors, including long-term contract pricing for our
flow business, the difference in overall transaction pricing
versus pool-level accounting measurements and, less
significantly, efforts to support our affordable housing
mission. Upon adoption of SFAS 157, our losses on certain
credit guarantees will generally relate to our efforts to meet
our affordable housing goals. See CRITICAL ACCOUNTING
POLICIES AND ESTIMATES Fair Value Measurements
for information concerning the change in initial recognition of
fair value of our guarantee obligations.
Effective January 1, 2008, upon the adoption of
SFAS 157, which amended FIN 45, we estimate the fair
value of our newly-issued guarantee obligations as an amount
equal to the fair value of compensation received, inclusive of
all rights related to the transaction, in exchange for our
guarantee. As a result, we no longer record estimates of
deferred gains or immediate day one losses on most
guarantees. All unamortized amounts recorded prior to
January 1, 2008 will continue to be amortized using
existing amortization methods. This change had a significant
positive impact on our financial results for the three and six
months ended June 30, 2008. For the three and six months
ended June 30, 2007, we recognized losses of
$150 million and $327 million, respectively, on
certain guarantor swap transactions entered into during the
period and we deferred gains of $365 million and
$650 million, respectively, on newly-issued guarantees
entered into during those periods.
Losses
on Loans Purchased
Losses on non-performing loans purchased from the mortgage pools
underlying PCs and Structured Securities occur when the
acquisition basis of the purchased loan exceeds the estimated
fair value of the loan on the date of purchase. Effective
December 2007, we made certain operational changes for
purchasing delinquent loans from PC pools, which significantly
reduced the volume of our delinquent loan purchases in the
period and consequently the amount of our losses on loans
purchased for the three and six months ended June 30, 2008.
We made these operational changes in order to better reflect our
expectations of future credit losses and in consideration of our
capital requirements. For the three months ended June 30,
2008, as a result of increases in delinquency rates of loans
underlying our PCs and Structured Securities and our increasing
efforts to reduce foreclosures, the number of loan modifications
increased significantly as compared to the first quarter of
2008. When a loan is modified, we generally exercise our
repurchase option and hold the modified loan in our retained
portfolio. The increase in modifications during the second
quarter of 2008 resulted in higher losses than during the first
quarter of 2008. See Recoveries on Loans Impaired upon
Purchase and CREDIT RISKS Table
42 Changes in Loans Purchased Under Financial
Guarantees for additional information about the impacts
from non-performing loans on our financial results.
During the three and six months ended June 30, 2008, the
market-based valuation of non-performing loans continued to be
adversely affected by the expectation of higher default costs
and reduced liquidity in the single-family mortgage market.
However, our losses on loans purchased decreased 55% to
$120 million during the three months ended June 30,
2008 compared to $264 million during the three months ended
June 30, 2007 due to our reduced volume of impaired loan
purchases during 2008. Losses on loans purchased decreased 64%
to $171 million during the six months ended June 30,
2008 compared to $480 million during the six months ended
June 30, 2007.
Income
Tax (Expense) Benefit
For the three months ended June 30, 2008 and 2007, we
reported an income tax (expense) benefit of $1.0 billion
and $(94) million, respectively. For the six months ended
June 30, 2008 and 2007, we reported an income tax (expense)
benefit of $1.5 billion and $303 million,
respectively. See NOTE 12: INCOME TAXES to our
consolidated financial statements for additional information.
Segment
Earnings
Our operations consist of three reportable segments, which are
based on the type of business activities each
performs Investments, Single-family Guarantee and
Multifamily. The activities of our business segments are
described in EXECUTIVE SUMMARY
Segments. Certain activities that are not part of a
segment are included in the All Other category; this category
consists of certain unallocated corporate items, such as
remediation and restructuring costs, costs related to the
resolution of certain legal matters and certain income tax
items. We manage and evaluate performance of the segments and
All Other using a Segment Earnings approach. Segment Earnings is
calculated for the segments by adjusting net income (loss) for
certain investment-related activities and credit
guarantee-related activities. Segment Earnings differs
significantly from, and should not be used as a substitute for,
net income (loss) before cumulative effect of change in
accounting principle or net income (loss) as determined in
accordance with GAAP. There are important limitations to using
Segment Earnings as a measure of our financial performance.
Among them, our regulatory capital requirements are based on our
GAAP results. Segment Earnings adjusts for the effects of
certain gains and losses and mark-to-fair-value items which,
depending on market circumstances, can significantly affect,
positively or negatively, our GAAP results and which, in recent
periods, have caused us to record GAAP net losses. GAAP net
losses will adversely impact our regulatory capital, regardless
of results reflected in Segment Earnings. Also, our definition
of Segment Earnings may differ from similar measures used by
other companies. However, we believe that the presentation of
Segment Earnings highlights the results from ongoing operations
and the underlying results of the segments in a manner that is
useful to the way we manage and evaluate the performance of our
business. See NOTE 16: SEGMENT REPORTING to our
consolidated financial statements for more information regarding
our segments and the adjustments used to calculate Segment
Earnings.
In managing our business, we present the operating performance
of our segments using Segment Earnings. Segment Earnings
presents our results on an accrual basis as the cash flows from
our segments are earned over time. The objective of Segment
Earnings is to present our results in a manner more consistent
with our business models. The business model for
our investment activity is one where we generally buy and hold
our investments in mortgage-related assets for the long term,
fund our investments with debt and use derivatives to minimize
interest rate risk and generate net interest income in line with
our return on equity objectives. We believe it is meaningful to
measure the performance of our investment business using
long-term returns, not short-term value. The business model for
our credit guarantee activity is one where we are a long-term
guarantor in the conforming mortgage markets, manage credit risk
and generate guarantee and credit fees, net of incurred credit
losses. As a result of these business models, we believe that
this accrual-based metric is a meaningful way to present our
results as actual cash flows are realized, net of credit losses
and impairments. We believe Segment Earnings provides us with a
view of our financial results that is more consistent with our
business objectives, which helps us better evaluate the
performance of our business, both from period-to-period and over
the longer term.
Investments
Segment
Through our Investments segment, we seek to generate attractive
returns on our mortgage-related investment portfolio while
maintaining a disciplined approach to interest-rate risk and
capital management. We seek to accomplish this objective through
opportunistic purchases, sales and restructurings of mortgage
assets. Although we are primarily a buy-and-hold investor in
mortgage assets, we may sell assets that are no longer expected
to produce desired returns to reduce risk, respond to capital
constraints, provide liquidity or structure certain transactions
that improve our returns. We estimate our expected investment
returns using an OAS approach.
Table 11 presents the Segment Earnings of our Investments
segment.
Table
11 Segment Earnings and Key Metrics
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars in millions)
|
|
|
Segment Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,481
|
|
|
$
|
990
|
|
|
$
|
1,780
|
|
|
$
|
1,892
|
|
Non-interest income (loss)
|
|
|
(125
|
)
|
|
|
30
|
|
|
|
(110
|
)
|
|
|
54
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
(130
|
)
|
|
|
(133
|
)
|
|
|
(261
|
)
|
|
|
(261
|
)
|
Other non-interest expense
|
|
|
(7
|
)
|
|
|
(8
|
)
|
|
|
(16
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
(137
|
)
|
|
|
(141
|
)
|
|
|
(277
|
)
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings before income tax expense
|
|
|
1,219
|
|
|
|
879
|
|
|
|
1,393
|
|
|
|
1,670
|
|
Income tax expense
|
|
|
(426
|
)
|
|
|
(308
|
)
|
|
|
(487
|
)
|
|
|
(585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings, net of taxes
|
|
|
793
|
|
|
|
571
|
|
|
|
906
|
|
|
|
1,085
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
530
|
|
|
|
(464
|
)
|
|
|
(653
|
)
|
|
|
(1,545
|
)
|
Credit guarantee-related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
(3,096
|
)
|
|
|
(379
|
)
|
|
|
(1,571
|
)
|
|
|
(310
|
)
|
Fully taxable-equivalent adjustment
|
|
|
(105
|
)
|
|
|
(97
|
)
|
|
|
(215
|
)
|
|
|
(190
|
)
|
Tax-related adjustments
|
|
|
1,004
|
|
|
|
394
|
|
|
|
992
|
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(1,667
|
)
|
|
|
(546
|
)
|
|
|
(1,447
|
)
|
|
|
(1,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss)
|
|
$
|
(874
|
)
|
|
$
|
25
|
|
|
$
|
(541
|
)
|
|
$
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key metrics Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities Mortgage-related investment
portfolio:(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities
|
|
$
|
91,054
|
|
|
$
|
29,238
|
|
|
$
|
112,598
|
|
|
$
|
56,313
|
|
Non-Freddie Mac mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-related securities
|
|
|
24,688
|
|
|
|
3,520
|
|
|
|
34,071
|
|
|
|
4,832
|
|
Non-agency mortgage-related securities
|
|
|
1,024
|
|
|
|
24,825
|
|
|
|
1,884
|
|
|
|
52,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchases of securities Mortgage-related
investment portfolio
|
|
$
|
116,766
|
|
|
$
|
57,583
|
|
|
$
|
148,553
|
|
|
$
|
113,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth rate of mortgage-related investment portfolio (annualized)
|
|
|
46.9
|
%
|
|
|
(2.0
|
)%
|
|
|
19.5
|
%
|
|
|
1.8
|
%
|
Return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest yield Segment Earnings basis
|
|
|
0.80
|
%
|
|
|
0.57
|
%
|
|
|
0.50
|
%
|
|
|
0.53
|
%
|
|
|
(1)
|
Based on unpaid principal balance
and excludes mortgage-related securities traded, but not yet
settled.
|
(2)
|
Exclude Single-family mortgage
loans.
|
Segment Earnings for our Investments segment increased
$222 million in the second quarter of 2008 compared to the
second quarter of 2007. For the Investments segment, Segment
Earnings net interest income increased $491 million and our
Segment Earnings net interest yield increased 23 basis
points for the second quarter of 2008 compared to the second
quarter of 2007. The increases in Segment Earnings net interest
income and net interest yield were primarily driven by
fixed-rate assets purchased at significantly wider spreads
relative to our funding costs, as well as the amortization of
gains on certain futures positions that matured in March 2008.
Partially offsetting the increase in Segment Earnings for our
Investments segment was the recognition of security impairments
during the second quarter of 2008 of $142 million
associated with anticipated future principal losses on our
non-agency mortgage-related securities compared to security
impairments of $1 million in the second quarter of 2007.
Security impairments that reflect expected or realized credit
principal losses are
realized immediately pursuant to GAAP and in Segment Earnings.
In contrast, non-credit related security impairments are not
included in Segment Earnings. These non-credit related security
impairments are deferred and amortized prospectively into
Segment Earnings on a straight-line basis over five years for
securities in the retained portfolio and over three years for
securities in the cash and investments portfolio.
Segment Earnings for our Investments segment decreased
$179 million in the six months ended June 30, 2008
compared to the six months ended June 30, 2007.
Additionally, Segment Earnings net interest income decreased
$112 million and our Segment Earnings net interest yield
decreased 3 basis points for the six months ended
June 30, 2008 compared to the six months ended
June 30, 2007. These decreases were primarily due to spread
compression between our floating rate assets and liabilities
during the first quarter of 2008. As rates declined in the first
quarter of 2008, our floating rate assets reset faster than our
floating rate debt. Declining rates also contributed to an
increase in net interest expense on our pay-fixed swaps that was
only partially offset by floating rate debt that reset. The
decreases in Segment Earnings net interest income and net
interest yield were mostly offset by purchases of fixed rate
assets at significantly wider spreads relative to our funding
costs as well as the amortization of gains on certain futures
positions that matured in March 2008. Also contributing to the
decrease in Segment Earnings for our Investment segment was the
recognition of security impairments during the six months ended
June 30, 2008, of $144 million associated with
anticipated future principal losses on our non-agency
mortgage-related securities compared to $1 million of
security impairments recognized during the six months ended
June 30, 2007.
In the three and the six months ended June 30, 2008, the
annualized growth rates of our mortgage-related investment
portfolio were 46.9% and 19.5%, respectively, compared to (2.0)%
and 1.8% for the three and six months ended June 30, 2007.
The unpaid principal balance of our mortgage-related investment
portfolio increased from $663.2 billion at
December 31, 2007 to $728.0 billion at June 30,
2008. The overall increase in the unpaid principal balance of
our mortgage-related investment portfolio was primarily due to
more favorable investment opportunities for agency securities,
due to liquidity concerns in the market, during the latter half
of the first quarter and continuing into the second quarter. In
response, our net purchase commitment activity increased
considerably as we deployed capital at favorable OAS levels. In
addition, as of March 1, 2008, the voluntary growth limit
on our retained portfolio is no longer in effect and during
March, OFHEO reduced our mandatory target capital surplus from
30% to 20%, allowing us to take advantage of these favorable
investment opportunities.
We held $74.1 billion of non-Freddie Mac agency
mortgage-related securities and $212.7 billion of
non-agency mortgage-related securities as of June 30, 2008
compared to $47.8 billion of non-Freddie Mac agency
mortgage-related securities and $233.8 billion of
non-agency mortgage-related securities as of December 31,
2007.
At June 30, 2008 and December 31, 2007, we held
investments of $85.6 billion and $101.3 billion,
respectively, of non-agency mortgage-related securities backed
by subprime loans. In addition to the contractual interest
payments, we receive substantial monthly remittances of
principal repayments on these securities, which totaled more
than $7 billion and $15 billion during the three and
six months ended June 30, 2008, respectively, representing
a return on our investment in these securities. These securities
include significant credit enhancement, particularly through
subordination, and 91% and 100% of these securities were
investment grade at June 30, 2008 and December 31,
2007, respectively. The unrealized losses, net of tax, on these
securities are included in AOCI and totaled $9.5 billion
and $5.6 billion at June 30, 2008 and
December 31, 2007, respectively. We believe that the
declines in fair values for these securities are mainly
attributable to decreased liquidity and larger risk premiums in
the mortgage market.
We also invested in non-agency mortgage-related securities
backed by Alt-A and other loans in our mortgage-related
investment portfolio. We have classified these securities as
Alt-A if the
securities were labeled as
Alt-A when
sold to us or if we believe the underlying collateral includes a
significant amount of
Alt-A loans.
We have classified $47.6 billion and $51.3 billion of
our single-family non-agency mortgage-related securities as
Alt-A and
other loans at June 30, 2008 and December 31, 2007,
respectively. In addition to the contractual interest payments,
we receive substantial monthly remittances of principal
repayments on these securities, which totaled more than
$2 billion and $4 billion during the three and six
months ended June 30, 2008, respectively, representing a
return on our investment in these securities. We have focused
our purchases on credit-enhanced, senior tranches of these
securities, which provide additional protection due to
subordination. 98% and 100% of these securities were investment
grade at June 30, 2008 and December 31, 2007,
respectively. The unrealized losses, net of tax, on these
securities are included in AOCI and totaled $7.3 billion
and $1.7 billion at June 30, 2008 and
December 31, 2007, respectively. The declines in fair
values for these securities are mainly attributable to decreased
liquidity and larger risk premiums in the mortgage market. See
CONSOLIDATED BALANCE SHEETS ANALYSIS Retained
Portfolio for additional information regarding our
mortgage-related securities.
Single-Family
Guarantee Segment
Through our Single-family Guarantee segment, we seek to issue
guarantees that we believe offer attractive long-term returns
relative to anticipated credit costs while fulfilling our
mission to provide liquidity, stability and affordability in the
residential mortgage market. In addition, we seek to improve our
share of the total residential mortgage securitization market by
enhancing customer service and increasing the volume of business
with our customers.
Table 12 presents the Segment Earnings of our Single-family
Guarantee segment.
Table 12
Segment Earnings and Key Metrics Single-Family
Guarantee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Segment Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income(1)
|
|
$
|
58
|
|
|
$
|
179
|
|
|
$
|
135
|
|
|
$
|
347
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income
|
|
|
840
|
|
|
|
704
|
|
|
|
1,735
|
|
|
|
1,381
|
|
Other non-interest
income(1)
|
|
|
103
|
|
|
|
28
|
|
|
|
207
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
943
|
|
|
|
732
|
|
|
|
1,942
|
|
|
|
1,431
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
(212
|
)
|
|
|
(209
|
)
|
|
|
(416
|
)
|
|
|
(408
|
)
|
Provision for credit losses
|
|
|
(2,630
|
)
|
|
|
(469
|
)
|
|
|
(3,979
|
)
|
|
|
(758
|
)
|
REO operations expense
|
|
|
(265
|
)
|
|
|
(16
|
)
|
|
|
(473
|
)
|
|
|
(30
|
)
|
Other non-interest expense
|
|
|
(29
|
)
|
|
|
(19
|
)
|
|
|
(48
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
(3,136
|
)
|
|
|
(713
|
)
|
|
|
(4,916
|
)
|
|
|
(1,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings (loss) before income tax expense
|
|
|
(2,135
|
)
|
|
|
198
|
|
|
|
(2,839
|
)
|
|
|
542
|
|
Income tax (expense) benefit
|
|
|
747
|
|
|
|
(69
|
)
|
|
|
993
|
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings (loss), net of taxes
|
|
|
(1,388
|
)
|
|
|
129
|
|
|
|
(1,846
|
)
|
|
|
353
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit guarantee-related adjustments
|
|
|
1,822
|
|
|
|
833
|
|
|
|
1,648
|
|
|
|
330
|
|
Tax-related adjustments
|
|
|
(638
|
)
|
|
|
(293
|
)
|
|
|
(577
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
1,184
|
|
|
|
540
|
|
|
|
1,071
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss)
|
|
$
|
(204
|
)
|
|
$
|
669
|
|
|
$
|
(775
|
)
|
|
$
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key metrics Single-family Guarantee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances and Growth (in billions, except rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average securitized balance of single-family credit guarantee
portfolio(2)
|
|
$
|
1,764
|
|
|
$
|
1,551
|
|
|
$
|
1,746
|
|
|
$
|
1,522
|
|
Issuance Single-family credit
guarantees(2)
|
|
$
|
132
|
|
|
$
|
118
|
|
|
$
|
245
|
|
|
$
|
232
|
|
Fixed-rate products Percentage of
issuances(3)
|
|
|
90.0
|
%
|
|
|
78.6
|
%
|
|
|
91.3
|
%
|
|
|
76.8
|
%
|
Liquidation rate Single-family credit guarantees
(annualized
rate)(4)
|
|
|
20.8
|
%
|
|
|
16.2
|
%
|
|
|
18.9
|
%
|
|
|
15.8
|
%
|
Credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
rate(5)
|
|
|
0.93
|
%
|
|
|
0.42
|
%
|
|
|
|
|
|
|
|
|
Delinquency transition
rate(6)
|
|
|
22.8
|
%
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
REO inventory increase, net (number of units)
|
|
|
3,610
|
|
|
|
610
|
|
|
|
7,635
|
|
|
|
1,475
|
|
Single-family credit losses, in basis points (annualized)
|
|
|
18.1
|
|
|
|
2.0
|
|
|
|
15.1
|
|
|
|
1.8
|
|
Market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage debt outstanding (total U.S. market, in
billions)(7)
|
|
$
|
11,227
|
|
|
$
|
10,862
|
|
|
$
|
11,227
|
|
|
$
|
10,862
|
|
30-year
fixed mortgage
rate(8)
|
|
|
6.1
|
%
|
|
|
6.4
|
%
|
|
|
6.0
|
%
|
|
|
6.3
|
%
|
|
|
(1)
|
In connection with the use of
securitization trusts for the underlying assets of our PCs and
Structured Securities in December 2007, we began recording trust
management income in non-interest income. Trust management
income represents the fees we earn as administrator, issuer and
trustee. Previously, the benefit derived from interest earned on
principal and interest cash flows between the time they were
remitted to us by servicers and the date of distribution to our
PCs and Structured Securities holders was recorded to net
interest income.
|
(2)
|
Based on unpaid principal balance.
|
(3)
|
Excludes fixed-rate Structured
Securities backed by non-Freddie Mac issued mortgage-related
securities.
|
(4)
|
Includes termination of long-term
standby commitments.
|
(5)
|
Represents the percentage of
single-family loans in our credit guarantee portfolio, based on
loan count, which are 90 days or more past due at period
end and excluding loans underlying Structured Transactions. See
CREDIT RISKS Mortgage Credit Risk for a
description of our Structured Transactions.
|
(6)
|
Calculated based on all loans that
have been reported as 90 days or more delinquent or in
foreclosure in the preceding year, which have subsequently
transitioned to REO. The rate does not reflect other loss
events, such as short-sales and
deed-in-lieu
transactions.
|
(7)
|
U.S. single-family mortgage debt
outstanding as of March 31, 2008 for 2008 and June 30,
2007 for 2007. Source: Federal Reserve Flow of Funds Accounts of
the United States of America dated June 5, 2008.
|
(8)
|
Based on Freddie Macs Primary
Mortgage Market Survey, or PMMS. Represents the national average
mortgage commitment rate to a qualified borrower exclusive of
the fees and points required by the lender. This commitment rate
applies only to conventional financing on conforming mortgages
with LTV ratios of 80% or less.
|
Segment Earnings (loss) for our Single-family Guarantee segment
declined to a loss of $(1.4) billion for the three months
ended June 30, 2008 compared to Segment Earnings of
$129 million for the three months ended June 30, 2007.
Segment Earnings (loss) for our Single-family Guarantee segment
declined to a loss of $(1.8) billion for the six months
ended June 30, 2008 compared to Segment Earnings of
$353 million for the six months ended June 30, 2007.
These declines reflect an increase in credit-related expenses
due to higher delinquency rates, higher volumes of
non-performing loans and foreclosures, higher severity of losses
on a per-property basis and a decline in home prices and other
regional economic conditions. The decline in Segment Earnings
for this segment for the three and six months ended
June 30, 2008 was partially offset by an increase in
Segment Earnings management and guarantee income as compared to
the three and six months ended June 30, 2007. The increase
in Segment Earnings management and guarantee income for this
segment for the three and six months ended June 30, 2008 is
primarily due to higher average balances of the single-family
credit guarantee portfolio and higher delivery and credit fee
amortization. Amortization of upfront fees increased as a result
of cumulative
catch-up
adjustments recognized for the three and six months ended
June 30, 2008. These cumulative
catch-up
adjustments result in a pattern of revenue recognition that is
consistent with our economic release from risk and the timing of
the recognition of losses on pools of mortgage loans we
guarantee.
Table 13 below provides summary information about Segment
Earnings management and guarantee income for the Single-family
Guarantee segment. Segment Earnings management and guarantee
income consists of contractual amounts due to us related to our
management and guarantee fees as well as amortization of credit
fees.
Table 13
Segment Earnings Management and Guarantee Income
Single-Family Guarantee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(dollars in millions, rates in basis points)
|
|
|
Contractual management and guarantee fees
|
|
$
|
708
|
|
|
|
15.8
|
|
|
$
|
610
|
|
|
|
15.5
|
|
|
$
|
1,415
|
|
|
|
16.0
|
|
|
$
|
1,196
|
|
|
|
15.5
|
|
Amortization of upfront fees included in other liabilities
|
|
|
132
|
|
|
|
2.9
|
|
|
|
94
|
|
|
|
2.4
|
|
|
|
320
|
|
|
|
3.6
|
|
|
|
185
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings management and guarantee income
|
|
|
840
|
|
|
|
18.7
|
|
|
|
704
|
|
|
|
17.9
|
|
|
|
1,735
|
|
|
|
19.6
|
|
|
|
1,381
|
|
|
|
17.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile to consolidated GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification between net interest income and management and
guarantee
fee(1)
|
|
|
54
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
Credit guarantee-related
adjustments(2)
|
|
|
(156
|
)
|
|
|
|
|
|
|
(135
|
)
|
|
|
|
|
|
|
(317
|
)
|
|
|
|
|
|
|
(200
|
)
|
|
|
|
|
Multifamily management and guarantee
income(3)
|
|
|
19
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income, GAAP
|
|
$
|
757
|
|
|
|
|
|
|
$
|
591
|
|
|
|
|
|
|
$
|
1,546
|
|
|
|
|
|
|
$
|
1,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Management and guarantee fees
earned on mortgage loans held in our retained portfolio are
reclassified from net interest income within the Investments
segment to management and guarantee fees within the
Single-family Guarantee segment.
Buy-up and
buy-down fees are transferred from the Single-family Guarantee
segment to the Investments segment.
|
(2)
|
Primarily represent credit fee
amortization adjustments.
|
(3)
|
Represents management and guarantee
income recognized related to our Multifamily segment that is not
included in our Single-family Guarantee segment.
|
For the three months ended June 30, 2008 and 2007, the
annualized growth rates of our single-family credit guarantee
portfolio were 8.8% and 14.6%, respectively. For the six months
ended June 30, 2008 and 2007, the annualized growth rates
of our single-family credit guarantee portfolio were 9.5% and
15.8%, respectively. Our mortgage purchase volumes are impacted
by several factors, including origination volumes, mortgage
product and underwriting trends, competition, customer-specific
behavior and contract terms. Single-family mortgage purchase
volumes from individual customers can fluctuate significantly.
Despite these fluctuations, we expect our share of the overall
single-family mortgage securitization market to remain high in
the remainder of 2008 as compared to recent years, as mortgage
originators have generally tightened their credit standards,
causing conforming mortgages to be the predominant product in
the market for the three and six months ended June 30,
2008. We have seen improvements in the credit quality of
mortgages delivered to us in 2008.
We have recently implemented several increases in delivery fees,
which are paid at the time of securitization. These increases
include an additional 25 basis point fee assessed on all
loans purchased or guaranteed through flow-business channels, as
well as higher or new upfront fees for certain mortgages deemed
to be higher-risk based on product type, property type, loan
purpose, LTV ratio
and/or
borrower credit scores. Upfront fees are recognized in Segment
Earnings contractual management and guarantee fee income. For
GAAP presentation fees paid after January 1, 2003 are
amortized as part of income on guarantee obligation. We expect
these increases in delivery fees, once fully implemented with
contract renewals, coupled with increases in market share, to
have a positive impact on our operations. Given the volatility
in the credit market during the three and six months ended
June 30, 2008, we will continue to closely monitor the
pricing of our management and guarantee fees as well as our
delivery fee rates and make adjustments when appropriate.
We have also made changes to our underwriting guidelines for
loans delivered to us for purchase or securitization in order to
reduce our credit risk exposure for new business. These changes
include reducing purchases of mortgages with LTV ratios over
95%, and limiting combinations of higher-risk characteristics in
loans we purchase, including those with reduced documentation.
As with fee increases, in some cases binding commitments under
existing customer contracts may delay the effective dates of
underwriting adjustments for a period of months.
Our Segment Earnings provision for credit losses for the
Single-family Guarantee segment increased to $2.6 billion
for the three months ended June 30, 2008, compared to
$0.5 billion for the three months ended June 30, 2007.
Our Segment Earnings provision for credit losses for the
Single-family Guarantee segment increased to $4.0 billion
for the six months ended June 30, 2008, compared to
$0.8 billion for the six months ended June 30, 2007,
due to continued credit deterioration in our single-family
credit guarantee portfolio, primarily related to 2006 and 2007
loan purchases. Mortgages in our single-family credit guarantee
portfolio purchased by us in 2006 and 2007 have higher
delinquency rates, higher transition rates to foreclosure, as
well as higher loss severities on a per-property basis than our
historical experiences. Our provision for credit losses is based
on our estimate of incurred losses inherent in both our retained
mortgage loan portfolio and our credit
guarantee portfolio using recent historical performance, such as
trends in delinquency rates, recent charge-off experience,
recoveries from credit enhancements and other loss mitigation
activities.
The delinquency rate on our single-family credit guarantee
portfolio, representing those loans which are 90 days or
more past due and excluding loans underlying Structured
Transactions, increased to 93 basis points as of
June 30, 2008 from 65 basis points as of
December 31, 2007. Increases in delinquency rates occurred
in all product types for the three months ended June 30,
2008, but were most significant for interest-only,
Alt-A and
ARM mortgages. Although we believe that our delinquency rates
remain low relative to conforming loan delinquency rates of
other industry participants, we expect our delinquency rates
will continue to rise in 2008.
The impact of the weak housing market was first evident during
2007 in areas of the country where unemployment rates have been
relatively high, such as the North Central region. However, we
have also experienced significant increases in delinquency rates
and REO activity in the West, Northeast and Southeast regions
during the six months ended June 30, 2008, compared to the
six months ended June 30, 2007, particularly in the states
of California, Florida, Nevada and Arizona. The West region
represents approximately 26% of our REO acquisitions during the
six months ended June 30, 2008, based on the number of
units. The highest concentration in the West region is in the
state of California. At June 30, 2008, our REO inventory in
California represented approximately 25% of our total REO
inventory. California has accounted for an increasing amount of
our credit losses and it comprised approximately 30% of our
total credit losses in the three months ended June 30, 2008.
During the six months ended June 30, 2008, our
single-family credit guarantee portfolio also continued to
experience increases in the rate at which loans transitioned
from delinquency to foreclosure. The increase in these
delinquency transition rates, compared to our historical
experience, has been progressively worse for mortgage loans
purchased by us during 2006 and 2007. This trend is, in part,
due to the increase of non-traditional mortgage loans, such as
interest-only and
Alt-A
mortgages, as well as an increase in estimated current LTV
ratios for mortgage loans originated during those years. For the
three months ended June 30, 2008, single-family
charge-offs, gross, were $722 million compared to
$114 million for the three months ended June 30, 2007.
Single-family charge-offs, gross, increased $970 million to
$1.2 billion for the six months ended June 30, 2008 as
compared to $207 million for the six months ended
June 30, 2007, primarily due to the increase in the volume
of REO acquisitions as well as continued deterioration in the
real estate market. In addition, there has also been an increase
in the average charge-offs, on a per property basis, during the
three and six months ended June 30, 2008 compared to the
three and six months ended June 30, 2007.
Multifamily
Segment
Through our Multifamily segment, we seek to generate attractive
returns on our investments in multifamily mortgage loans while
fulfilling our mission to provide stability and liquidity for
the financing of affordable rental housing nationwide. We also
seek to issue guarantees that we believe offer attractive
long-term returns relative to anticipated credit costs. Prior to
2008, we have not typically securitized multifamily mortgages,
because our multifamily loans are typically large, customized,
non-homogenous loans, that are not as conducive to
securitization as single-family loans and the market for
multifamily securitizations is relatively illiquid. Accordingly,
we typically hold multifamily loans for investment purposes.
Beginning in 2008, we have increased our guarantee
securitization of multifamily mortgages and we expect to further
increase our multifamily mortgage guarantee activity in the
remainder of 2008, as market conditions permit.
Table 14 presents the Segment Earnings of our Multifamily
segment.
Table 14
Segment Earnings and Key Metrics
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
Segment Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
98
|
|
|
$
|
94
|
|
|
$
|
173
|
|
|
$
|
217
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income
|
|
|
17
|
|
|
|
16
|
|
|
|
34
|
|
|
|
30
|
|
Other non-interest income
|
|
|
7
|
|
|
|
5
|
|
|
|
15
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
24
|
|
|
|
21
|
|
|
|
49
|
|
|
|
39
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
(49
|
)
|
|
|
(49
|
)
|
|
|
(98
|
)
|
|
|
(94
|
)
|
Provision for credit losses
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
(16
|
)
|
|
|
(4
|
)
|
REO operations expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIHTC partnerships
|
|
|
(108
|
)
|
|
|
(135
|
)
|
|
|
(225
|
)
|
|
|
(243
|
)
|
Other non-interest expense
|
|
|
(5
|
)
|
|
|
(8
|
)
|
|
|
(9
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
(169
|
)
|
|
|
(193
|
)
|
|
|
(348
|
)
|
|
|
(353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings (loss) before income tax benefit
|
|
|
(47
|
)
|
|
|
(78
|
)
|
|
|
(126
|
)
|
|
|
(97
|
)
|
LIHTC partnerships tax benefit
|
|
|
149
|
|
|
|
135
|
|
|
|
298
|
|
|
|
273
|
|
Income tax benefit
|
|
|
16
|
|
|
|
27
|
|
|
|
44
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings, net of taxes
|
|
|
118
|
|
|
|
84
|
|
|
|
216
|
|
|
|
209
|
|
Reconciliation to GAAP net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative-related adjustments
|
|
|
(3
|
)
|
|
|
(7
|
)
|
|
|
(14
|
)
|
|
|
(8
|
)
|
Credit guarantee-related adjustments
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Tax-related adjustments
|
|
|
2
|
|
|
|
3
|
|
|
|
6
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
(12
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income
|
|
$
|
113
|
|
|
$
|
78
|
|
|
$
|
204
|
|
|
$
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key metrics Multifamily:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances and Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of Multifamily loan
portfolio(1)
|
|
$
|
62,706
|
|
|
$
|
47,016
|
|
|
$
|
60,759
|
|
|
$
|
46,418
|
|
Average balance of Multifamily guarantee
portfolio(1)
|
|
|
13,209
|
|
|
|
7,762
|
|
|
|
12,274
|
|
|
|
7,908
|
|
Purchases Multifamily loan
portfolio(1)
|
|
|
4,189
|
|
|
|
2,409
|
|
|
|
8,252
|
|
|
|
5,528
|
|
Purchases Multifamily guarantee
portfolio(1)
|
|
|
1,105
|
|
|
|
106
|
|
|
|
3,487
|
|
|
|
126
|
|
Liquidation rate Multifamily loan portfolio
(annualized rate)
|
|
|
7.9
|
%
|
|
|
12.4
|
%
|
|
|
6.9
|
%
|
|
|
13.8
|
%
|
Credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
rate(2)
|
|
|
0.04
|
%
|
|
|
0.05
|
%
|
|
|
0.04
|
%
|
|
|
0.05
|
%
|
Allowance for loan losses
|
|
$
|
78
|
|
|
$
|
31
|
|
|
$
|
78
|
|
|
$
|
31
|
|
|
|
(1)
|
Based on unpaid principal balance.
|
(2)
|
Based on net carrying value of
mortgages 90 days or more delinquent or in foreclosure.
|
Segment Earnings for our Multifamily segment increased
$34 million, or 40%, for the three months ended
June 30, 2008 compared to the three months ended
June 30, 2007 primarily due to a decrease in non-interest
expense. LIHTC losses decreased $27 million for the three
months ended June 30, 2008 compared to the three months
ended June 30, 2007. Provision for credit losses for our
Multifamily segment increased $6 million for the three
months ended June 30, 2008 compared to the three months
ended June 30, 2007, primarily due to a slight increase in
the amount of impaired loans in the second quarter of 2008. Loan
purchases into the Multifamily loan portfolio were
$4.2 billion for the three months ended June 30, 2008, a
74% increase compared to the three months ended June 30,
2007, as we continue to provide stability and liquidity for the
financing of rental housing nationwide.
Segment Earnings for our Multifamily segment increased
$7 million, or 3%, for the six months ended June 30,
2008 compared to the six months ended June 30, 2007
primarily due to higher LIHTC partnership tax benefit and income
tax benefit, higher non-interest income and lower non-interest
expense, partially offset by a decrease in net interest income.
LIHTC partnership tax benefit increased $25 million for the
six months ended June 30, 2008 compared to the six months
ended June 30, 2007 as we began to see the benefit from new
fund investments entered into during 2007. There have been no
new LIHTC investments in 2008. Provision for credit losses for
our Multifamily segment increased $12 million for the six
months ended June 30, 2008 compared to the six months ended
June 30, 2007. The net interest income of this segment
declined $44 million for the six months ended June 30,
2008, compared to the six months ended June 30, 2007 due to
significantly lower yield maintenance fee income on declines in
loan refinancing activity. Loan purchases into the Multifamily
loan portfolio were $8.3 billion for the six months ended
June 30, 2008, a 49% increase when compared to the six
months ended June 30, 2007.
CONSOLIDATED
BALANCE SHEETS ANALYSIS
The following discussion of our consolidated balance sheets
should be read in conjunction with our consolidated financial
statements, including the accompanying notes. Also see
CRITICAL ACCOUNTING POLICIES AND ESTIMATES for more
information concerning our more significant accounting policies
and estimates applied in determining our reported financial
position.
Retained
Portfolio
We are primarily a buy-and-hold investor in mortgage assets. We
invest principally in mortgage loans and mortgage-related
securities, which consist of securities issued by us, Fannie Mae
and the Government National Mortgage Association, or Ginnie Mae,
and other financial institutions. We refer to these investments
that are recorded on our consolidated balance sheet as our
retained portfolio.
Table 15 provides detail regarding the mortgage loans and
mortgage-related securities in our retained portfolio.
Table 15
Characteristics of Mortgage Loans and Mortgage-Related
Securities in our Retained Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
23,621
|
|
|
$
|
1,128
|
|
|
$
|
24,749
|
|
|
$
|
20,461
|
|
|
$
|
1,266
|
|
|
$
|
21,727
|
|
Interest-only
|
|
|
379
|
|
|
|
814
|
|
|
|
1,193
|
|
|
|
246
|
|
|
|
1,434
|
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional
|
|
|
24,000
|
|
|
|
1,942
|
|
|
|
25,942
|
|
|
|
20,707
|
|
|
|
2,700
|
|
|
|
23,407
|
|
RHS/FHA/VA
|
|
|
1,253
|
|
|
|
|
|
|
|
1,253
|
|
|
|
1,182
|
|
|
|
|
|
|
|
1,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
25,253
|
|
|
|
1,942
|
|
|
|
27,195
|
|
|
|
21,889
|
|
|
|
2,700
|
|
|
|
24,589
|
|
Multifamily(3)
|
|
|
59,743
|
|
|
|
4,085
|
|
|
|
63,828
|
|
|
|
53,114
|
|
|
|
4,455
|
|
|
|
57,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
84,996
|
|
|
|
6,027
|
|
|
|
91,023
|
|
|
|
75,003
|
|
|
|
7,155
|
|
|
|
82,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCs and Structured
Securities:(1)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
314,483
|
|
|
|
96,779
|
|
|
|
411,262
|
|
|
|
269,896
|
|
|
|
84,415
|
|
|
|
354,311
|
|
Multifamily
|
|
|
267
|
|
|
|
2,378
|
|
|
|
2,645
|
|
|
|
2,522
|
|
|
|
137
|
|
|
|
2,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total PCs and Structured Securities
|
|
|
314,750
|
|
|
|
99,157
|
|
|
|
413,907
|
|
|
|
272,418
|
|
|
|
84,552
|
|
|
|
356,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related
securities:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-related
securities:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
37,273
|
|
|
|
35,434
|
|
|
|
72,707
|
|
|
|
23,140
|
|
|
|
23,043
|
|
|
|
46,183
|
|
Multifamily
|
|
|
661
|
|
|
|
134
|
|
|
|
795
|
|
|
|
759
|
|
|
|
163
|
|
|
|
922
|
|
Ginnie Mae:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
429
|
|
|
|
163
|
|
|
|
592
|
|
|
|
468
|
|
|
|
181
|
|
|
|
649
|
|
Multifamily
|
|
|
49
|
|
|
|
|
|
|
|
49
|
|
|
|
82
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total agency mortgage-related securities
|
|
|
38,412
|
|
|
|
35,731
|
|
|
|
74,143
|
|
|
|
24,449
|
|
|
|
23,387
|
|
|
|
47,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime(6)
|
|
|
464
|
|
|
|
85,160
|
|
|
|
85,624
|
|
|
|
498
|
|
|
|
100,827
|
|
|
|
101,325
|
|
Alt-A and
other(7)
|
|
|
3,466
|
|
|
|
44,105
|
|
|
|
47,571
|
|
|
|
3,762
|
|
|
|
47,551
|
|
|
|
51,313
|
|
Commercial mortgage-backed securities
|
|
|
25,452
|
|
|
|
39,386
|
|
|
|
64,838
|
|
|
|
25,709
|
|
|
|
39,095
|
|
|
|
64,804
|
|
Obligations of states and political
subdivisions(8)
|
|
|
13,251
|
|
|
|
48
|
|
|
|
13,299
|
|
|
|
14,870
|
|
|
|
65
|
|
|
|
14,935
|
|
Manufactured
housing(9)
|
|
|
1,192
|
|
|
|
201
|
|
|
|
1,393
|
|
|
|
1,250
|
|
|
|
222
|
|
|
|
1,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related
securities(10)
|
|
|
43,825
|
|
|
|
168,900
|
|
|
|
212,725
|
|
|
|
46,089
|
|
|
|
187,760
|
|
|
|
233,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of retained portfolio
|
|
$
|
481,983
|
|
|
$
|
309,815
|
|
|
|
791,798
|
|
|
$
|
417,959
|
|
|
$
|
302,854
|
|
|
|
720,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums, discounts, deferred fees, impairments of unpaid
principal balances and other basis adjustments
|
|
|
|
|
|
|
|
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
(655
|
)
|
Net unrealized losses on mortgage-related securities, pre-tax
|
|
|
|
|
|
|
|
|
|
|
(30,853
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,116
|
)
|
Allowance for loan losses on mortgage loans held-for-investment
|
|
|
|
|
|
|
|
|
|
|
(468
|
)
|
|
|
|
|
|
|
|
|
|
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retained portfolio per consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
$
|
760,860
|
|
|
|
|
|
|
|
|
|
|
$
|
709,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Variable-rate single-family
mortgage loans and mortgage-related securities include those
with a contractual coupon rate that, prior to contractual
maturity, is either scheduled to change or is subject to change
based on changes in the composition of the underlying
collateral. Single-family mortgage loans also include mortgages
with balloon/reset provisions.
|
(2)
|
Includes $1.6 billion and
$2.2 billion as of June 30, 2008 and December 31,
2007, respectively, of mortgage loans categorized as
Alt-A due
solely to reduced documentation standards at the time of loan
origination. Although we do not categorize our single-family
loans into prime or subprime, we recognize that certain of the
mortgage loans in our retained portfolio exhibit higher risk
characteristics. Total single-family loans include
$1.3 billion at both June 30, 2008 and
December 31, 2007, of loans with higher-risk
characteristics, which we define as loans with original LTV
ratios greater than 90% and borrower credit scores less than 620
at the time of loan origination. See CREDIT
RISKS Mortgage Credit Risk
Table 37 Characteristics of Single-Family
Mortgage Portfolio for more information on LTV ratios and
credit scores.
|
(3)
|
Variable-rate multifamily mortgage
loans include only those loans that, as of the reporting date,
have a contractual coupon rate that is subject to change.
|
(4)
|
For our PCs and Structured
Securities, we are subject to the credit risk associated with
the underlying mortgage loan collateral.
|
(5)
|
Agency mortgage-related securities
are generally not separately rated by nationally recognized
statistical rating organizations, but are viewed as having a
level of credit quality at least equivalent to non-agency
mortgage-related securities
AAA-rated or
equivalent.
|
|
|
(6)
|
Single-family non-agency
mortgage-related securities backed by subprime residential loans
include significant credit enhancements, particularly through
subordination. For information about how these securities are
rated, see Table 16 Investments in
Available-for-Sale Non-Agency Mortgage-Related Securities backed
by Subprime Loans and
Alt-A and
Other Loans in our Retained Portfolio,
Table 22 Ratings of Available-For-Sale
Non-Agency Mortgage-Related Securities backed by Subprime Loans
at June 30, 2008 and Table 23
Ratings of Available-For-Sale Non-Agency Mortgage-Related
Securities backed by Subprime Loans at June 30, 2008 and
July 28, 2008.
|
(7)
|
Single-family non-agency
mortgage-related securities backed by
Alt-A and
other mortgage loans include significant credit enhancements,
particularly through subordination. For information about how
these securities are rated, see Table 16
Investments in Available-For-Sale Non-Agency Mortgage-Related
Securities backed by Subprime Loans and
Alt-A and
Other Loans in our Retained Portfolio,
Table 24 Ratings of Available-For-Sale
Non-Agency Mortgage-Related Securities backed by
Alt-A and
Other Loans at June 30, 2008 and
Table 25 Ratings of Available-For-Sale
Non-Agency Mortgage-Related Securities backed by
Alt-A and
Other Loans at June 30, 2008 and July 28, 2008.
|
(8)
|
Consist of mortgage revenue bonds.
Approximately 61% and 67% of these securities held at
June 30, 2008 and December 31, 2007, respectively,
were
AAA-rated as
of those dates, based on the lowest rating available.
|
(9)
|
At June 30, 2008 and
December 31, 2007, 33% and 34%, respectively, of
mortgage-related securities backed by manufactured housing bonds
were rated BBB− or above, based on the lowest rating
available. For the same dates, 93% of manufactured housing bonds
had credit enhancements, including primary monoline insurance
that covered 23% of the manufactured housing bonds. At
June 30, 2008 and December 31, 2007, we had secondary
insurance on 73% and 72% of these bonds that were not covered by
the primary monoline insurance, respectively. Approximately 3%
and 28% of these mortgage-related securities were backed by
manufactured housing bonds
AAA-rated at
June 30, 2008 and December 31, 2007, respectively,
based on the lowest rating available.
|
(10)
|
Credit ratings for most non-agency
mortgage-related securities are designated by no fewer than two
nationally recognized statistical rating organizations.
Approximately 75% and 96% of total non-agency mortgage-related
securities held at June 30, 2008 and December 31,
2007, respectively, were
AAA-rated as
of those dates, based on the lowest rating available.
|
The unpaid principal balance of our retained portfolio increased
by $71.0 billion to $791.8 billion at June 30,
2008 compared to December 31, 2007. The unpaid principal
balance of the mortgage-related securities held in our retained
portfolio increased by $62.1 billion during the six months
ended June 30, 2008, while the balance of mortgage loans
increased by $8.9 billion over the same period. The overall
increase in the unpaid principal balance of our retained
portfolio was primarily due to more favorable investment
opportunities for agency securities given a broad market decline
driven by a lack of liquidity in the market during the latter
half of the first quarter and continuing into the second
quarter. In response, our net purchase activity increased
considerably as we deployed capital at favorable OAS levels. As
of March 1, 2008 the voluntary growth limit on our retained
portfolio is no longer in effect. Additionally, our mandatory
target capital surplus was reduced by OFHEO to 20% from 30%
above our statutory minimum capital requirement on
March 19, 2008.
Included in our retained portfolio are mortgage loans with
higher risk characteristics and mortgage-related securities
backed by subprime loans and
Alt-A and
other loans. Included in our
Alt-A loans
are monthly treasury average, or MTA, loans that are indexed to
the moving average one-year Constant Maturity Treasury.
Single-Family
Mortgage Loans Held in Our Retained Portfolio
We generally do not classify our investments in single-family
mortgage loans within our retained portfolio as either prime or
subprime; however, we recognize that there are mortgage loans in
our retained portfolio with higher risk characteristics. We
estimate that there are $1.3 billion at both June 30,
2008 and December 31, 2007, of loans with higher-risk
characteristics, which we define as loans with original LTV
ratios greater than 90% and FICO scores less than 620 at the
time of loan origination.
Non-Agency
Mortgage-Related Securities Backed by Subprime
Loans
Participants in the mortgage market often characterize
single-family loans based upon their overall credit quality at
the time of origination, generally considering them to be prime
or subprime. There is no universally accepted definition of
subprime. The subprime segment of the mortgage market primarily
serves borrowers with poorer credit payment histories and such
loans typically have a mix of credit characteristics that
indicate a higher likelihood of default and higher loss
severities than prime loans. Such characteristics might include
a combination of high LTV ratios, low credit scores or
originations using lower underwriting standards such as limited
or no documentation of a borrowers income.
At June 30, 2008 and December 31, 2007, we held
investments of $85.6 billion and $101.3 billion,
respectively, of non-agency mortgage-related securities backed
by subprime loans in our retained portfolio. In addition to the
contractual interest payments, we receive substantial monthly
remittances of principal repayments on these securities, which
totaled more than $7 billion and $15 billion during
the three and six months ended June 30, 2008, respectively,
representing a return on our investment in these securities.
These securities include significant credit enhancement,
particularly through subordination, and 91% and 100% of these
securities were investment grade at June 30, 2008 and
December 31, 2007, respectively. Of the securities rated
below investment grade by at least one rating agency, 87% are
rated as investment grade by at least one other rating agency.
The unrealized losses, net of tax, on these securities are
included in AOCI and totaled $9.5 billion and
$5.6 billion at June 30, 2008 and December 31,
2007, respectively. We believe that the declines in fair values
for these securities are mainly attributable to decreased
liquidity and larger risk premiums in the mortgage market.
Non-Agency
Mortgage-Related Securities Backed by
Alt-A and
Other Loans
Many mortgage market participants classify single-family loans
with credit characteristics that range between their prime and
subprime categories as
Alt-A.
Although there is no universally accepted definition of
Alt-A,
industry participants have used this classification principally
to describe loans for which the underwriting process has been
streamlined in order to reduce the documentation requirements of
the borrower or allow alternative documentation. We have
classified these securities as
Alt-A if the
securities were labeled as
Alt-A when
sold to us or if we believe the underlying collateral includes
a significant amount of
Alt-A loans.
We have classified $47.6 billion and $51.3 billion of
our single-family non-agency mortgage-related securities as
Alt-A and
other loans at June 30, 2008 and December 31, 2007,
respectively. Of these securities $20.5 billion and
$21.3 billion are backed by
Alt-A MTA
loans at June 30, 2008 and December 31, 2007,
respectively. In addition to the contractual interest payments,
we receive substantial monthly remittances of principal
repayments on these
Alt-A and
other securities, which totaled more than $2 billion and
$4 billion during the three and six months ended
June 30, 2008, respectively, representing a return on our
investment in these securities. We have focused our purchases on
credit-enhanced, senior tranches of these securities, which
provide additional protection due to subordination. Of these
securities, 98% and 100% were investment grade at June 30,
2008 and December 31, 2007, respectively. The unrealized
losses, net of tax, on these securities are included in AOCI and
totaled $7.3 billion and $1.7 billion at June 30,
2008 and December 31, 2007, respectively. We believe the
declines in fair values for these securities are mainly
attributable to decreased liquidity and larger risk premiums in
the mortgage market.
Table 16 provides an analysis of investments in
available-for-sale non-agency mortgage-related securities backed
by subprime loans and
Alt-A and
other loans in our retained portfolio at June 30, 2008.
Table 16
Investments in Available-For-Sale Non-Agency Mortgage-Related
Securities backed by Subprime Loans and
Alt-A and
Other Loans in our Retained Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
Principal
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Collateral
|
|
|
Original
|
|
|
June 30, 2008
|
|
|
Current
|
|
|
Investment
|
|
Non-agency mortgage-related securities backed by:
|
|
Balance
|
|
|
Cost
|
|
|
Losses
|
|
|
Delinquency(1)
|
|
|
%
AAA(2)
|
|
|
% AAA
|
|
|
%
AAA(3)
|
|
|
Grade(4)
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
84,720
|
|
|
$
|
84,332
|
|
|
$
|
(14,290
|
)
|
|
|
31
|
%
|
|
|
100
|
%
|
|
|
55
|
%
|
|
|
55
|
%
|
|
|
91
|
%
|
Second lien
|
|
|
892
|
|
|
|
729
|
|
|
|
(307
|
)
|
|
|
9
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities, backed by subprime
loans
|
|
$
|
85,612
|
|
|
$
|
85,061
|
|
|
$
|
(14,597
|
)
|
|
|
31
|
%
|
|
|
100
|
%
|
|
|
55
|
%
|
|
|
55
|
%
|
|
|
91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
$
|
43,093
|
|
|
$
|
42,869
|
|
|
$
|
(9,879
|
)
|
|
|
15
|
%
|
|
|
100
|
%
|
|
|
98
|
%
|
|
|
94
|
%
|
|
|
97
|
%
|
Other(5)
|
|
|
4,478
|
|
|
|
4,479
|
|
|
|
(1,382
|
)
|
|
|
|
|
|
|
100
|
%
|
|
|
19
|
%
|
|
|
19
|
%
|
|
|
89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities, backed by Alt-A
and other loans
|
|
$
|
47,571
|
|
|
$
|
47,348
|
|
|
$
|
(11,261
|
)
|
|
|
|
|
|
|
100
|
%
|
|
|
91
|
%
|
|
|
87
|
%
|
|
|
97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Determined based on loans that are
60 days or more past due that underlie the securities and
based on servicing data reported for June 30, 2008.
|
(2)
|
Reflects the composition of the
portfolio that was AAA-rated as of the date of our acquisition
of the security, based on the lowest rating available.
|
(3)
|
Reflects the AAA-rated composition
of the securities as of July 28, 2008, based on the lowest
rating available.
|
(4)
|
Reflects the composition of these
securities with credit ratings BBB- or above as of July 28,
2008, based on unpaid principal balance and the lowest rating
available.
|
(5)
|
Includes securities backed by
FHA/VA mortgage, home-equity lines of credit and other
residential loans.
|
Table 17 summarizes amortized cost, estimated fair values
and corresponding gross unrealized gains and gross unrealized
losses for available-for-sale securities and estimated fair
values for trading securities by major security type held in our
retained portfolio.
Table 17
Available-for-Sale Securities and Trading Securities in our
Retained Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
June 30,
2008
|
|
(in millions)
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
287,354
|
|
|
$
|
1,855
|
|
|
$
|
(3,731
|
)
|
|
$
|
285,478
|
|
Subprime
|
|
|
85,061
|
|
|
|
|
|
|
|
(14,597
|
)
|
|
|
70,464
|
|
Commercial mortgage-backed securities
|
|
|
64,874
|
|
|
|
28
|
|
|
|
(3,565
|
)
|
|
|
61,337
|
|
Alt-A and other
|
|
|
47,348
|
|
|
|
8
|
|
|
|
(11,261
|
)
|
|
|
36,095
|
|
Fannie Mae
|
|
|
44,647
|
|
|
|
375
|
|
|
|
(348
|
)
|
|
|
44,674
|
|
Obligations of states and political subdivisions
|
|
|
13,320
|
|
|
|
43
|
|
|
|
(776
|
)
|
|
|
12,587
|
|
Manufactured housing
|
|
|
1,070
|
|
|
|
100
|
|
|
|
(48
|
)
|
|
|
1,122
|
|
Ginnie Mae
|
|
|
422
|
|
|
|
19
|
|
|
|
(1
|
)
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale mortgage-related securities
|
|
$
|
544,096
|
|
|
$
|
2,428
|
|
|
$
|
(34,327
|
)
|
|
$
|
512,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
129,844
|
|
Fannie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,490
|
|
Ginnie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading mortgage-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
159,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
346,569
|
|
|
$
|
2,981
|
|
|
$
|
(2,583
|
)
|
|
$
|
346,967
|
|
Subprime
|
|
|
101,278
|
|
|
|
12
|
|
|
|
(8,584
|
)
|
|
|
92,706
|
|
Commercial mortgage-backed securities
|
|
|
64,965
|
|
|
|
515
|
|
|
|
(681
|
)
|
|
|
64,799
|
|
Alt-A and other
|
|
|
51,456
|
|
|
|
15
|
|
|
|
(2,543
|
)
|
|
|
48,928
|
|
Fannie Mae
|
|
|
45,688
|
|
|
|
513
|
|
|
|
(344
|
)
|
|
|
45,857
|
|
Obligations of states and political subdivisions
|
|
|
14,783
|
|
|
|
146
|
|
|
|
(351
|
)
|
|
|
14,578
|
|
Manufactured housing
|
|
|
1,149
|
|
|
|
131
|
|
|
|
(12
|
)
|
|
|
1,268
|
|
Ginnie Mae
|
|
|
545
|
|
|
|
19
|
|
|
|
(2
|
)
|
|
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale mortgage-related securities
|
|
$
|
626,433
|
|
|
$
|
4,332
|
|
|
$
|
(15,100
|
)
|
|
$
|
615,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,216
|
|
Fannie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,697
|
|
Ginnie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading mortgage-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
342,309
|
|
|
$
|
852
|
|
|
$
|
(7,852
|
)
|
|
$
|
335,309
|
|
Subprime
|
|
|
118,670
|
|
|
|
66
|
|
|
|
(57
|
)
|
|
|
118,679
|
|
Commercial mortgage-backed securities
|
|
|
56,664
|
|
|
|
53
|
|
|
|
(1,903
|
)
|
|
|
54,814
|
|
Alt-A and other
|
|
|
55,828
|
|
|
|
49
|
|
|
|
(413
|
)
|
|
|
55,464
|
|
Fannie Mae
|
|
|
42,894
|
|
|
|
213
|
|
|
|
(835
|
)
|
|
|
42,272
|
|
Obligations of states and political subdivisions
|
|
|
14,063
|
|
|
|
145
|
|
|
|
(234
|
)
|
|
|
13,974
|
|
Manufactured housing
|
|
|
1,102
|
|
|
|
130
|
|
|
|
(2
|
)
|
|
|
1,230
|
|
Ginnie Mae
|
|
|
617
|
|
|
|
14
|
|
|
|
(9
|
)
|
|
|
622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale mortgage-related securities
|
|
$
|
632,147
|
|
|
$
|
1,522
|
|
|
$
|
(11,305
|
)
|
|
$
|
622,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,401
|
|
Fannie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,476
|
|
Ginnie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading mortgage-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008, our gross unrealized losses on
available-for-sale mortgage-related securities were
$34.3 billion. The main components of these losses are
gross unrealized losses of $29.4 billion related to
non-agency mortgage-related securities backed by subprime, Alt-A
and other loans and commercial mortgage-backed securities. We
believe that these unrealized losses on non-agency
mortgage-related securities at June 30, 2008, were
principally a result of decreased liquidity and larger risk
premiums in the non-agency mortgage market. All securities in an
unrealized loss position are evaluated to determine if the
impairment is
other-than-temporary.
The evaluation of these securities considers all available
information, including cash flow analyses based on default and
prepayment assumptions.
Other-Than-Temporary
Impairments
Of our $212.7 billion in non-agency mortgage-related
securities in our available-for-sale portfolio at June 30,
2008, we have identified securities backed by subprime and
Alt-A and
other loans with $2.3 billion of unpaid principal balance
that are probable of incurring a contractual principal or
interest loss due to significant recent deterioration in the
performance of the underlying collateral of these securities and
risk related to the performance of credit enhancements related
to one monoline insurer where we have determined that it is both
probable a principal and interest shortfall will occur on the
insured securities and that in such a case, there is substantial
uncertainty surrounding the insurers ability to pay all
future claims. As such, we realized impairment losses on these
securities of $826 million, which were determined to be
other-than-temporary. The recent deterioration has not impacted
our ability and intent to hold these securities. We estimate
that the future expected principal and interest shortfall on
these securities will be significantly less than the impairment
loss required to be recorded under GAAP, as we expect these
shortfalls to be less than the recent fair value declines. The
portion of the impairment charges associated with these expected
recoveries will be accreted back through net interest income in
future periods.
While it is possible that under certain conditions, defaults and
severity of losses on our remaining available-for-sale
securities for which we have not recorded an impairment charge
could exceed our subordination and credit enhancement levels and
a principal or interest loss could occur, we do not believe that
those conditions were probable at June 30, 2008. Based on
our ability and intent to hold our remaining available-for-sale
securities for a sufficient time to recover all unrealized
losses and our consideration of all available information, we
have concluded that the reduction in fair value of these
securities was temporary at June 30, 2008. These
assessments require significant judgment and are subject to
change as the performance of the individual securities changes,
mortgage conditions evolve and our assessments of future
performance are updated. Furthermore, different market
participants could arrive at materially different conclusions
regarding the likelihood of various default and severity
outcomes and these differences tend to be magnified for
nontraditional products such as Alt-A MTA loans.
The above impairment charges and unrealized losses do not have a
significant impact on our liquidity and capital resources. See
LIQUIDITY AND CAPITAL RESOURCES for a discussion of
our sources of liquidity.
The evaluation of unrealized losses on our available-for-sale
portfolio for other-than-temporary impairment contemplates
numerous factors. We perform an evaluation on a
security-by-security
basis considering all available information. Important factors
include the length of time and extent to which the fair value of
the security has been less than book value; the impact of
changes in credit ratings (i.e., rating agency
downgrades); our intent and ability to retain the security in
order to allow for a recovery in fair value; and an analysis of
cash flows based on default and prepayment assumptions of the
underlying collateral. Implicit in the cash flow analysis is
information relevant to expected cash flows (such as collateral
performance and characteristics) that also underlies the other
impairment factors mentioned above, and we qualitatively
consider all available information when assessing whether an
impairment is other-than-temporary. The relative importance of
this information varies based on the facts and circumstances
surrounding each security, as well as the economic environment
at the time of assessment. Based on the results of this
evaluation, if it is determined that the impairment is
other-than-temporary, the carrying value of the security is
written down to fair value, and a loss is recognized through
earnings. We consider all available information in determining
the recovery period and anticipated holding periods for our
available-for-sale securities. Because we are a portfolio
investor, we generally hold available-for-sale securities in our
retained portfolio to maturity. An important underlying factor
we consider in determining the period to recover unrealized
losses on our available-for-sale securities is the estimated
life of the security. Since our available-for-sale securities
are prepayable, the average life is far shorter than the
contractual maturity.
We have concluded that the unrealized losses included in
Table 17 are temporary since we have the ability and intent
to hold the securities to recovery. These conclusions are based
on the following analysis, which is conducted on a quarterly
basis and is subject to change as new information regarding
delinquencies, severities, timing of losses, prepayment rates
and other factors becomes available.
Freddie
Mac and Fannie Mae Securities
These securities generally fit into one of two categories:
Unseasoned Securities These securities are
utilized for resecuritization transactions. We frequently
resecuritize agency securities, typically unseasoned
pass-through securities. In these resecuritization transactions,
we typically retain an interest representing a majority of the
cash flows, but consider the resecuritization to be a sale of
all of the securities for purposes of assessing if an impairment
is other-than-temporary. As these securities have generally been
recently acquired, they generally have coupon rates and prices
close to par, so any decline in the fair value of these agency
securities is relatively small. This means that the decline
could be recovered easily, and we expect that the recovery
period would be in the near term. Notwithstanding this, we
recognize other-than-temporary impairments on any of these
securities that are likely to be sold. This population is
identified based on our expectations of resecuritization volume
and our eligible collateral. If any of the
securities identified as likely to be sold are in a loss
position, other-than-temporary impairment is recorded because
management cannot assert that it has the intent to hold such
securities to recovery. Any additional losses realized upon sale
result from further declines in fair value subsequent to the
balance sheet date. For securities that are not likely to be
sold, we expect to recover any unrealized losses by holding them
to recovery.
Seasoned Securities These securities are not
usually utilized for resecuritization transactions. We hold the
seasoned agency securities that are in an unrealized loss
position at least to recovery. Typically, we hold all seasoned
agency securities to maturity. As the principal and interest on
these securities are guaranteed and we have the ability and
intent to hold these securities, any unrealized loss will be
recovered.
The unrealized losses on agency securities are primarily a
result of movements in interest rates.
Non-Agency
Mortgage-Related Securities
We believe the unrealized losses on our non-agency
mortgage-related securities are primarily a result of decreased
liquidity and larger risk premiums. With the exception of the
other-than-temporarily impaired securities discussed previously,
we have not identified any securities that were probable of
incurring a contractual principal or interest loss at
June 30, 2008. As such, and based on our ability and intent
to hold these securities for a period of time sufficient to
recover all unrealized losses, we have concluded that the
impairment of these securities was temporary.
Our review of the securities backed by subprime and Alt-A and
other loans includes cash flow analyses of the individual
securities based on underlying collateral performance, including
the collectibility of amounts that would be recovered from
monoline insurers. In the case of monoline insurers, we also
consider certain qualitative factors such as the availability of
capital, generation of new business, pending regulatory action,
ratings, security prices, credit default swap levels traded on
the insurers and our own cash flow analysis. In order to
determine whether securities are other-than-temporarily
impaired, these analyses use assumptions about the losses likely
to result from the underlying collateral that are currently more
than 60 days delinquent and then evaluate what percentage
of the remaining collateral (that are current or less than
60 days delinquent) would have to default to create a loss.
The future default rate, severity and prepayment assumptions
required to realize a loss are evaluated for probability of
occurring. If these assumptions are probable, considering all
other factors, the impairment is judged to be other than
temporary.
We perform a stress test based on the key assumptions in the
above analyses to determine whether we would receive our
contractual payments on these securities in adverse credit
environments. These tests simulate the distribution of cash
flows from the underlying loans to the securities that we hold
considering different default rate and severity assumptions. In
evaluating each scenario, we use numerous assumptions (in
addition to the default rate and severity assumptions),
including, but not limited to the timing of losses, prepayment
rates, the collectability of excess interest and interest rates
that could materially impact the results. These tests are
performed on a
security-by-security
basis for all of our securities backed by subprime and Alt-A and
other loans. We have concluded that the assumptions required for
us to not receive all of our contractual cash flows on any one
security, with the exception of the impaired securities
previously discussed, were not probable at June 30, 2008.
These assessments require judgment and other parties could
arrive at different conclusions as to the probability of losses
occurring.
In evaluating our non-agency mortgage-related securities backed
by subprime and
Alt-A and
other loans for other-than-temporary impairment, we noted and
specifically considered that the percentage of securities that
were
AAA-rated
and the percentage that were investment grade had decreased
since acquisition and had decreased between the latest balance
sheet date and the release of these financial statements. We
expect this trend to continue for the remainder of 2008.
Although the ratings have declined, the ratings themselves have
not been determinative that a loss is probable. According to
Standard & Poors, or S&P, a security may
withstand up to 115% of S&Ps base case loss
assumptions and still receive a BB, or below investment grade,
rating. In performing this evaluation, the cash flow analyses
indicate that it is not probable that we will not receive all of
our contractual cash flows. While we consider credit ratings in
our analysis, we believe that our detailed
security-by-security
cash flow analyses provide a more consistent view of the
ultimate collectibility of contractual amounts due to us. As
such, we have impaired securities with current ratings ranging
from B to AAA. See Tables 22 through 25 for the ratings of
our non-agency mortgage-related securities backed by subprime
and Alt-A
and other loans.
Furthermore, we consider significant declines in fair value
between June 30, 2008 and July 28, 2008 to assess if
they were indicative of potential future cash shortfalls. In
this assessment, we put greater emphasis on categorical pricing
information rather than security-by-security prices. Based on
our review, default levels and actual severity experienced were
within the range of outcomes considered during our June 30,
2008 impairment analysis. Based on our cash flow analyses, and
given that we have the ability and intent to hold these
securities to recovery, we determined that any further declines
in fair value did not result in the impairment being
other-than-temporary.
While the result of these analyses further supports our
conclusions that the levels of defaults and severities necessary
to create principal and interest shortfalls are not currently
probable on substantially all of our holdings, we have
identified 23 uninsured securities with $1.3 billion
of unpaid principal balance that we have judged probable of
incurring a contractual
principal or interest loss due to significant recent
deterioration in the performance of the underlying collateral of
these securities. In addition, we have identified
7 securities with $950 million of unpaid principal
balance with credit enhancements that included monoline
insurance where we have determined that it is not probable that
the monoline insurer will have the ability to pay all future
claims should a principal or interest shortfall occur and that
absent such coverage a principal loss is likely to occur. As
such, we realized impairment losses on these securities of
$826 million, which were determined to be
other-than-temporary during the second quarter of 2008. Our
analysis is conducted on a quarterly basis and is subject to
change as new information regarding delinquencies, severities,
loss timing, prepayments and other factors becomes available.
Our non-agency mortgage-related securities have not yet
experienced significant cumulative losses and our credit
enhancement levels continue to increase on most of our holdings.
While it is possible that under certain conditions, defaults and
loss severities on the remaining securities could reach or even
exceed the levels used for our stress test scenarios and a
principal or interest loss could occur on certain individual
securities, we do not believe that those conditions are probable
as of June 30, 2008.
Hypothetical
stress test scenarios on our investments in non-agency
mortgage-related securities backed by first lien
subprime loans
For our non-agency mortgage-related securities backed by first
lien subprime loans, we use several default rate and severity
stress test scenarios including those disclosed in
Table 18 Investments in Available-For-Sale
Non-Agency Mortgage-Related Securities Backed by First Lien
Subprime Loans. The stress test analysis included in the table
below has been enhanced to run different stress default rates on
various subcomponents of the portfolio in response to the
deteriorating credit environment and liquidity concerns in the
market. We divided the portfolio into delinquency quartiles and
ran the most stressful default rates on the quartiles with the
highest levels of current delinquencies. The stress default and
severity assumptions that would indicate a potential loss are
more severe than what we believe are probable based on our
judgment related to both current delinquency and severity
experience and historical data.
While the more stressful scenarios are beyond what we currently
believe are probable, this table gives insight into the
potential economic losses in very stressful conditions. Our most
severe default rate for our worst quartiles and severity
assumptions for all quartiles are 70% and 65%, respectively, for
these securities. As disclosed on Table 18, even in our
most severe stress test scenarios, our potential losses are only
3% of our total non-agency mortgage-related securities, backed
by first lien subprime loans. However, current mortgage market
conditions are unprecedented and actual default and severity
experience could differ from our expectations. Furthermore,
different market participants could arrive at different
conclusions regarding the likelihood of various default and
severity outcomes. Current collateral delinquency rates
presented in Table 18 averaged 31% for first lien subprime
loans, with asset-backed securities indices, or ABX, average
first lien severities approximating 48%. There are several
differences in the characteristics of the securities in our
portfolio as compared to the ABX. For example, the pass-through
securities in our portfolio reflect the entirety of the
underlying AAA cash flows while only a portion of the underlying
AAA cash flows backs the securities in the ABX.
Table 18 provides the summary results of the default rate
and severity stress test scenarios for our investments in
available-for-sale non-agency mortgage-related securities backed
by first lien subprime loans at June 30, 2008. In addition
to the stress tests scenarios, Table 18 also displays
underlying collateral performance and credit enhancement
statistics, by vintage and quartile of credit enhancement level.
Within each of these quartiles, there is a distribution of both
credit enhancement levels and delinquency performance, and
individual security performance will differ from the cohort as a
whole. Furthermore, some individual securities with lower
subordination could have higher delinquencies. The projected
economic losses presented in each stress test scenario represent
the cash losses we may experience given the related assumptions.
However, these amounts do not represent the other-than-temporary
impairment charge that would result under the given scenario.
Any other-than-temporary impairment charges would vary depending
on the fair value of the security at that point in time.
Table 18
Investments in Available-For-Sale Non-Agency Mortgage-Related
Securities Backed by First Lien Subprime Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Credit Enhancements Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying Collateral Performance
|
|
|
|
|
|
Minimum
|
|
|
Stress Test
Scenarios(4)
|
|
|
|
Delinquency
|
|
Unpaid Principal
|
|
|
|
|
|
Average Credit
|
|
|
Current
|
|
|
Default
|
|
|
Severity
|
|
|
Default
|
|
|
Severity
|
|
Acquisition Date
|
|
Quartile
|
|
Balance
|
|
|
Collateral
Delinquency(1)
|
|
|
Enhancement(2)
|
|
|
Subordination(3)
|
|
|
Rate
|
|
|
55
|
|
|
65
|
|
|
Rate
|
|
|
55
|
|
|
65
|
|
|
|
|
|
(dollars in millions)
|
|
|
2004 & Prior
|
|
|
1
|
|
|
$
|
338
|
|
|
|
12
|
%
|
|
|
52
|
%
|
|
|
21
|
%
|
|
|
45
|
%
|
|
$
|
|
|
|
$
|
|
|
|
|
50
|
%
|
|
$
|
|
|
|
$
|
|
|
2004 & Prior
|
|
|
2
|
|
|
|
333
|
|
|
|
18
|
|
|
|
52
|
|
|
|
22
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
2004 & Prior
|
|
|
3
|
|
|
|
307
|
|
|
|
21
|
|
|
|
65
|
|
|
|
24
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
2004 & Prior
|
|
|
4
|
|
|
|
322
|
|
|
|
31
|
|
|
|
63
|
|
|
|
17
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior subtotal
|
|
|
|
|
|
$
|
1,300
|
|
|
|
20
|
|
|
|
58
|
|
|
|
17
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
1
|
|
|
$
|
4,053
|
|
|
|
25
|
|
|
|
53
|
|
|
|
34
|
|
|
|
45
|
|
|
$
|
|
|
|
$
|
|
|
|
|
50
|
|
|
$
|
|
|
|
$
|
|
|
2005
|
|
|
2
|
|
|
|
3,918
|
|
|
|
33
|
|
|
|
58
|
|
|
|
37
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
3
|
|
|
|
3,957
|
|
|
|
37
|
|
|
|
51
|
|
|
|
29
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
2
|
|
2005
|
|
|
4
|
|
|
|
3,802
|
|
|
|
44
|
|
|
|
54
|
|
|
|
21
|
|
|
|
55
|
|
|
|
|
|
|
|
1
|
|
|
|
65
|
|
|
|
2
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 subtotal
|
|
|
|
|
|
$
|
15,730
|
|
|
|
34
|
|
|
|
54
|
|
|
|
21
|
|
|
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
|
|
|
|
$
|
2
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
1
|
|
|
$
|
8,019
|
|
|
|
29
|
|
|
|
29
|
|
|
|
20
|
|
|
|
50
|
|
|
$
|
|
|
|
$
|
5
|
|
|
|
55
|
|
|
$
|
|
|
|
$
|
62
|
|
2006
|
|
|
2
|
|
|
|
8,335
|
|
|
|
34
|
|
|
|
31
|
|
|
|
19
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
2
|
|
|
|
80
|
|
2006
|
|
|
3
|
|
|
|
8,213
|
|
|
|
38
|
|
|
|
31
|
|
|
|
20
|
|
|
|
55
|
|
|
|
|
|
|
|
31
|
|
|
|
65
|
|
|
|
55
|
|
|
|
254
|
|
2006
|
|
|
4
|
|
|
|
8,599
|
|
|
|
45
|
|
|
|
33
|
|
|
|
20
|
|
|
|
65
|
|
|
|
|
|
|
|
9
|
|
|
|
70
|
|
|
|
33
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 subtotal
|
|
|
|
|
|
$
|
33,166
|
|
|
|
37
|
|
|
|
31
|
|
|
|
19
|
|
|
|
|
|
|
$
|
|
|
|
$
|
45
|
|
|
|
|
|
|
$
|
90
|
|
|
$
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
1
|
|
|
$
|
7,989
|
|
|
|
13
|
|
|
|
31
|
|
|
|
21
|
|
|
|
50
|
|
|
$
|
|
|
|
$
|
3
|
|
|
|
55
|
|
|
$
|
|
|
|
$
|
25
|
|
2007
|
|
|
2
|
|
|
|
8,149
|
|
|
|
23
|
|
|
|
28
|
|
|
|
20
|
|
|
|
50
|
|
|
|
|
|
|
|
11
|
|
|
|
60
|
|
|
|
46
|
|
|
|
264
|
|
2007
|
|
|
3
|
|
|
|
7,807
|
|
|
|
29
|
|
|
|
27
|
|
|
|
20
|
|
|
|
55
|
|
|
|
|
|
|
|
19
|
|
|
|
65
|
|
|
|
47
|
|
|
|
372
|
|
2007
|
|
|
4
|
|
|
|
7,431
|
|
|
|
36
|
|
|
|
27
|
|
|
|
20
|
|
|
|
65
|
|
|
|
|
|
|
|
112
|
|
|
|
70
|
|
|
|
196
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 subtotal
|
|
|
|
|
|
$
|
31,376
|
|
|
|
25
|
|
|
|
28
|
|
|
|
20
|
|
|
|
|
|
|
$
|
|
|
|
$
|
145
|
|
|
|
|
|
|
$
|
289
|
|
|
$
|
1,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total uninsured non-agency mortgage-related securities, backed
by first lien subprime loans
|
|
|
|
|
|
$
|
81,572
|
|
|
|
31
|
|
|
|
35
|
|
|
|
17
|
|
|
|
|
|
|
$
|
|
|
|
$
|
191
|
|
|
|
|
|
|
$
|
381
|
|
|
$
|
2,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by first lien
subprime loans with monoline bond insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade monoline no
other-than-temporary impairments to date
|
|
|
|
|
|
$
|
2,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade monoline
other-than-temporary impairments taken
|
|
|
|
|
|
|
817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency mortgage-related securities, backed by first
lien subprime loans with monoline bond
insurance(5)
|
|
|
|
|
|
$
|
3,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities, backed by first
lien subprime loans
|
|
|
|
|
|
$
|
84,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Determined based on loans that are
60 days or more past due that underlie the securities.
|
(2)
|
Consists of subordination,
financial guarantees and other credit enhancements. Does not
include the benefit of excess interest.
|
(3)
|
Reflects the current credit
enhancement of the lowest security in each quartile.
|
(4)
|
Reflects the present value of
projected economic losses based on the disclosed hypothetical
cumulative default and loss severity rates against the
outstanding collateral balance.
|
(5)
|
Represents the amount of unpaid
principal balance covered by monoline insurance coverage. This
amount does not represent the maximum amount of losses we could
recover, as the monoline insurance also covers interest.
|
Hypothetical
stress test scenarios on our investments in non-agency
mortgage-related securities backed by
Alt-A
loans
For our non-agency mortgage-related securities backed by
Alt-A loans,
we use several default rate and severity stress test scenarios
including those disclosed in Table 19
Investments in Non-Agency Mortgage-Related Securities backed by
Alt-A Loans.
The stress test analysis included in the table below has been
enhanced to run different stress default rates on various
subcomponents of the portfolio in response to the deteriorating
credit environment and liquidity concerns in the market. We
divided the portfolio into delinquency quartiles and ran the
most stressful default rates on the cohorts with the highest
levels of current delinquencies. We believe that the stress
default and severity assumptions that would indicate a potential
loss are more severe than those implied by current collateral
delinquencies and conditions. While the more stressful scenarios
are beyond what we currently believe are probable, this table
gives insight into the potential economic losses in very
stressful outcomes.
Our most severe default rate for our worst quartiles is 60%. Our
most severe severity assumptions for our non-agency
mortgage-related securities backed by
non-MTA and
MTA Alt-A
loans are 50% and 55%, respectively. As disclosed in
Table 19, even in our most severe stress test scenarios,
our potential losses are only 4% of our total non-agency
mortgage-related securities, backed by
Alt-A loans.
However, current mortgage market conditions are unprecedented
and actual default and severity experience for
Alt-A loans
could differ from our expectations. Furthermore, different
market participants could arrive at materially different
conclusions regarding the likelihood of various default and
severity outcomes and these
differences tend to be magnified for nontraditional products
such as
Alt-A MTA
loans. Current collateral delinquency rates presented in
Table 19 averaged 15%.
Table 19 provides the summary results of the default rate
and severity stress test scenarios for our investments in
non-agency mortgage-related securities backed by
Alt-A loans
as of June 30, 2008, including securities backed by
Alt-A MTA
loans. In addition to the stress test scenarios, Table 19
also displays underlying collateral performance and credit
enhancement statistics, by vintage and quartile of credit
enhancement level. Within each of these quartiles, there is a
distribution of both credit enhancement levels and delinquency
performance, and individual security performance will differ
from the cohort as a whole. Furthermore, some individual
securities with lower subordination could have higher
delinquencies. The projected economic losses presented in each
stress test scenario represent the cash losses we may experience
given the related assumptions. However, these amounts do not
represent the other-than-temporary impairment charge that would
result under the given scenario. Any other-than-temporary
impairment charges would vary depending on the fair value of the
security at that point in time.
Table 19
Investments in Non-Agency Mortgage-Related Securities backed by
Alt-A
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
Underlying Collateral Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Stress Test
Scenarios(4)
|
|
|
|
Delinquency
|
|
Principal
|
|
|
Collateral
|
|
|
Average Credit
|
|
|
Current
|
|
|
Default
|
|
|
Severity
|
|
|
Default
|
|
|
Severity
|
|
Acquisition Date
|
|
Quartile
|
|
Balance
|
|
|
Delinquency(1)
|
|
|
Enhancement(2)
|
|
|
Subordination(3)
|
|
|
Rate
|
|
|
45%
|
|
|
50%
|
|
|
Rate
|
|
|
45%
|
|
|
50%
|
|
|
|
|
|
(dollars in millions)
|
|
|
Non-agency mortgage-related securities, backed by uninsured
non-MTA Alt-A loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior
|
|
|
1
|
|
|
$
|
1,268
|
|
|
|
2
|
%
|
|
|
10
|
%
|
|
|
6
|
%
|
|
|
10
|
%
|
|
$
|
|
|
|
$
|
|
|
|
|
15
|
%
|
|
$
|
2
|
|
|
$
|
4
|
|
2004 & Prior
|
|
|
2
|
|
|
|
1,241
|
|
|
|
4
|
|
|
|
14
|
|
|
|
8
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
1
|
|
|
|
6
|
|
2004 & Prior
|
|
|
3
|
|
|
|
1,311
|
|
|
|
6
|
|
|
|
16
|
|
|
|
10
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
10
|
|
|
|
20
|
|
2004 & Prior
|
|
|
4
|
|
|
|
1,390
|
|
|
|
12
|
|
|
|
24
|
|
|
|
13
|
|
|
|
30
|
|
|
|
3
|
|
|
|
7
|
|
|
|
40
|
|
|
|
22
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior subtotal
|
|
|
|
|
|
$
|
5,210
|
|
|
|
6
|
|
|
|
16
|
|
|
|
6
|
|
|
|
|
|
|
$
|
3
|
|
|
$
|
7
|
|
|
|
|
|
|
$
|
35
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
1
|
|
|
$
|
2,387
|
|
|
|
2
|
|
|
|
8
|
|
|
|
5
|
|
|
|
10
|
|
|
$
|
|
|
|
$
|
1
|
|
|
|
15
|
|
|
$
|
12
|
|
|
$
|
22
|
|
2005
|
|
|
2
|
|
|
|
2,327
|
|
|
|
7
|
|
|
|
13
|
|
|
|
6
|
|
|
|
20
|
|
|
|
11
|
|
|
|
19
|
|
|
|
30
|
|
|
|
61
|
|
|
|
87
|
|
2005
|
|
|
3
|
|
|
|
2,105
|
|
|
|
11
|
|
|
|
14
|
|
|
|
9
|
|
|
|
30
|
|
|
|
26
|
|
|
|
41
|
|
|
|
40
|
|
|
|
76
|
|
|
|
100
|
|
2005
|
|
|
4
|
|
|
|
1,988
|
|
|
|
21
|
|
|
|
24
|
|
|
|
10
|
|
|
|
40
|
|
|
|
15
|
|
|
|
25
|
|
|
|
50
|
|
|
|
49
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 subtotal
|
|
|
|
|
|
$
|
8,807
|
|
|
|
10
|
|
|
|
14
|
|
|
|
5
|
|
|
|
|
|
|
$
|
52
|
|
|
$
|
86
|
|
|
|
|
|
|
$
|
198
|
|
|
$
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
1
|
|
|
$
|
1,218
|
|
|
|
3
|
|
|
|
11
|
|
|
|
5
|
|
|
|
20
|
|
|
$
|
11
|
|
|
$
|
17
|
|
|
|
30
|
|
|
$
|
49
|
|
|
$
|
64
|
|
2006
|
|
|
2
|
|
|
|
1,247
|
|
|
|
11
|
|
|
|
15
|
|
|
|
5
|
|
|
|
30
|
|
|
|
32
|
|
|
|
41
|
|
|
|
40
|
|
|
|
63
|
|
|
|
78
|
|
2006
|
|
|
3
|
|
|
|
1,140
|
|
|
|
22
|
|
|
|
16
|
|
|
|
9
|
|
|
|
30
|
|
|
|
|
|
|
|
2
|
|
|
|
40
|
|
|
|
11
|
|
|
|
18
|
|
2006
|
|
|
4
|
|
|
|
1,201
|
|
|
|
34
|
|
|
|
15
|
|
|
|
9
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
3
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 subtotal
|
|
|
|
|
|
$
|
4,806
|
|
|
|
17
|
|
|
|
14
|
|
|
|
5
|
|
|
|
|
|
|
$
|
43
|
|
|
$
|
60
|
|
|
|
|
|
|
$
|
126
|
|
|
$
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
1
|
|
|
$
|
797
|
|
|
|
11
|
|
|
|
7
|
|
|
|
6
|
|
|
|
20
|
|
|
$
|
21
|
|
|
$
|
28
|
|
|
|
30
|
|
|
$
|
53
|
|
|
$
|
64
|
|
2007
|
|
|
2
|
|
|
|
801
|
|
|
|
17
|
|
|
|
14
|
|
|
|
7
|
|
|
|
30
|
|
|
|
1
|
|
|
|
3
|
|
|
|
40
|
|
|
|
16
|
|
|
|
25
|
|
2007
|
|
|
3
|
|
|
|
814
|
|
|
|
23
|
|
|
|
9
|
|
|
|
7
|
|
|
|
30
|
|
|
|
1
|
|
|
|
4
|
|
|
|
40
|
|
|
|
21
|
|
|
|
37
|
|
2007
|
|
|
4
|
|
|
|
807
|
|
|
|
28
|
|
|
|
13
|
|
|
|
7
|
|
|
|
40
|
|
|
|
2
|
|
|
|
9
|
|
|
|
50
|
|
|
|
24
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 subtotal
|
|
|
|
|
|
$
|
3,219
|
|
|
|
20
|
|
|
|
11
|
|
|
|
6
|
|
|
|
|
|
|
$
|
25
|
|
|
$
|
44
|
|
|
|
|
|
|
$
|
114
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uninsured non-agency mortgage-related securities, backed by
non-MTA Alt-A loans subtotal
|
|
|
|
|
|
$
|
22,042
|
|
|
|
12
|
|
|
|
14
|
|
|
|
5
|
|
|
|
|
|
|
$
|
123
|
|
|
$
|
197
|
|
|
|
|
|
|
$
|
473
|
|
|
$
|
678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by non-MTA Alt-A
loans with monoline bond insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monoline no other-than-temporary impairments to date
|
|
|
|
|
|
$
|
454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monoline other-than-temporary impairments taken
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency mortgage-related securities, backed by
non-MTA Alt-A loans with monoline bond
insurance(5)
|
|
|
|
|
|
$
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by Non-MTA Alt-A
loans subtotal
|
|
|
|
|
|
$
|
22,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
Underlying Collateral Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Stress Test
Scenarios(4)
|
|
|
|
Delinquency
|
|
Principal
|
|
|
Collateral
|
|
|
Average Credit
|
|
|
Current
|
|
|
Default
|
|
|
Severity
|
|
|
Default
|
|
|
Severity
|
|
Acquisition Date
|
|
Quartile
|
|
Balance
|
|
|
Delinquency(1)
|
|
|
Enhancement(2)
|
|
|
Subordination(3)
|
|
|
Rate
|
|
|
45%
|
|
|
55%
|
|
|
Rate
|
|
|
45%
|
|
|
55%
|
|
|
|
|
|
(dollars in millions)
|
|
|
Non-agency mortgage-related securities, backed by MTA
Alt-A loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 & Prior
|
|
|
1
|
|
|
$
|
1,126
|
|
|
|
15
|
%
|
|
|
28
|
%
|
|
|
18
|
%
|
|
|
25
|
%
|
|
$
|
|
|
|
$
|
|
|
|
|
45
|
%
|
|
$
|
2
|
|
|
$
|
26
|
|
2005 & Prior
|
|
|
2
|
|
|
|
1,167
|
|
|
|
17
|
|
|
|
25
|
|
|
|
18
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
18
|
|
|
|
62
|
|
2005 & Prior
|
|
|
3
|
|
|
|
1,016
|
|
|
|
21
|
|
|
|
25
|
|
|
|
18
|
|
|
|
35
|
|
|
|
|
|
|
|
16
|
|
|
|
55
|
|
|
|
53
|
|
|
|
104
|
|
2005 & Prior
|
|
|
4
|
|
|
|
926
|
|
|
|
29
|
|
|
|
27
|
|
|
|
22
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
12
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 & Prior subtotal
|
|
|
|
|
|
$
|
4,235
|
|
|
|
20
|
|
|
|
27
|
|
|
|
18
|
|
|
|
|
|
|
$
|
|
|
|
$
|
16
|
|
|
|
|
|
|
$
|
85
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
1
|
|
|
$
|
2,913
|
|
|
|
17
|
|
|
|
15
|
|
|
|
8
|
|
|
|
25
|
|
|
$
|
|
|
|
$
|
1
|
|
|
|
45
|
|
|
$
|
46
|
|
|
$
|
141
|
|
2006
|
|
|
2
|
|
|
|
2,299
|
|
|
|
20
|
|
|
|
17
|
|
|
|
10
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
26
|
|
|
|
128
|
|
2006
|
|
|
3
|
|
|
|
2,148
|
|
|
|
22
|
|
|
|
24
|
|
|
|
11
|
|
|
|
35
|
|
|
|
|
|
|
|
3
|
|
|
|
55
|
|
|
|
48
|
|
|
|
115
|
|
2006
|
|
|
4
|
|
|
|
2,115
|
|
|
|
24
|
|
|
|
23
|
|
|
|
14
|
|
|
|
40
|
|
|
|
|
|
|
|
1
|
|
|
|
60
|
|
|
|
86
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 subtotal
|
|
|
|
|
|
$
|
9,475
|
|
|
|
20
|
|
|
|
19
|
|
|
|
8
|
|
|
|
|
|
|
$
|
|
|
|
$
|
5
|
|
|
|
|
|
|
$
|
206
|
|
|
$
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
1
|
|
|
$
|
1,338
|
|
|
|
6
|
|
|
|
23
|
|
|
|
14
|
|
|
|
25
|
|
|
$
|
|
|
|
$
|
|
|
|
|
45
|
|
|
$
|
5
|
|
|
$
|
23
|
|
2007
|
|
|
2
|
|
|
|
1,624
|
|
|
|
12
|
|
|
|
21
|
|
|
|
7
|
|
|
|
30
|
|
|
|
|
|
|
|
1
|
|
|
|
50
|
|
|
|
14
|
|
|
|
56
|
|
2007
|
|
|
3
|
|
|
|
1,503
|
|
|
|
15
|
|
|
|
15
|
|
|
|
10
|
|
|
|
35
|
|
|
|
5
|
|
|
|
23
|
|
|
|
55
|
|
|
|
97
|
|
|
|
177
|
|
2007
|
|
|
4
|
|
|
|
1,519
|
|
|
|
19
|
|
|
|
30
|
|
|
|
8
|
|
|
|
40
|
|
|
|
|
|
|
|
3
|
|
|
|
60
|
|
|
|
52
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 subtotal
|
|
|
|
|
|
$
|
5,984
|
|
|
|
13
|
|
|
|
22
|
|
|
|
7
|
|
|
|
|
|
|
$
|
5
|
|
|
$
|
27
|
|
|
|
|
|
|
$
|
168
|
|
|
$
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uninsured non-agency mortgage-related securities, backed by MTA
Alt-A loans
subtotal
|
|
|
|
|
|
$
|
19,694
|
|
|
|
18
|
|
|
|
22
|
|
|
|
7
|
|
|
|
|
|
|
$
|
5
|
|
|
$
|
48
|
|
|
|
|
|
|
$
|
459
|
|
|
$
|
1,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by MTA
Alt-A loans
with monoline bond insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monoline no other-than-temporary impairments to date
|
|
|
|
|
|
$
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency mortgage-related securities, backed by MTA
Alt-A loans
with monoline bond
insurance(5)
|
|
|
|
|
|
$
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by MTA
Alt-A loans
subtotal
|
|
|
|
|
|
$
|
20,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities, backed by
Alt-A loans
|
|
|
|
|
|
$
|
43,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Determined based on loans that are
60 days or more past due that underlie the securities.
|
(2)
|
Consists of subordination,
financial guarantees and other credit enhancements. Does not
include the benefit of excess interest.
|
(3)
|
Reflects the current credit
enhancement of the lowest security in each quartile.
|
(4)
|
Reflects the present value of
projected economic losses based on the disclosed hypothetical
cumulative default and loss severity rates against the
outstanding collateral balance.
|
(5)
|
Represents the amount of unpaid
principal balance covered by monoline insurance coverage. This
amount does not represent the maximum amount of losses we could
recover, as the monoline insurance also covers interest.
|
|
|
|
|
|
Commercial mortgage-backed securities We
perform an analysis of the underlying collateral on a
security-by-security basis to determine whether we will receive
all of the contractual payments due to us. We believe the
declines in fair value are attributable to the deterioration of
liquidity and larger risk premiums in the commercial
mortgage-backed securities market consistent with the broader
credit markets and not to the performance of the underlying
collateral supporting the securities. Virtually all of these
securities are currently
AAA-rated
and the underlying collateral continue to have positive
delinquency trends and increased credit enhancement levels.
Since we generally hold these securities to maturity, we have
concluded that we have the ability and intent to hold these
securities to a recovery of the unrealized losses.
|
|
|
|
Obligations of states and political
subdivisions These investments consist of
mortgage revenue bonds. Approximately 61% and 67% of these
securities held at June 30, 2008 and December 31,
2007, respectively, were
AAA-rated as
of those dates, based on the lowest rating available. The
unrealized losses on obligations of states and political
subdivisions are primarily a result of movements in interest
rates. We have concluded that the impairment of these securities
is temporary based on our ability and intent to hold these
securities to recovery, the extent and duration of the decline
in fair value relative to the amortized cost as well as a lack
of any other facts or circumstances to suggest that the decline
was other-than-temporary. The issuer guarantees related to these
securities have led us to conclude that any credit risk is
minimal.
|
Table 20 summarizes our impairments recorded by security
type and the duration of the unrealized loss prior to impairment
of less than 12 months or 12 months or greater.
Table
20 Impairments on Mortgage-Related Securities
Recorded by Gross Unrealized Loss Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross Unrealized Loss Position
|
|
|
|
Less than
|
|
|
12 months
|
|
|
|
|
|
Less than
|
|
|
12 months
|
|
|
|
|
|
|
12 months
|
|
|
or greater
|
|
|
Total
|
|
|
12 months
|
|
|
or greater
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime(1)
|
|
$
|
(17
|
)
|
|
$
|
(505
|
)
|
|
$
|
(522
|
)
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
(1
|
)
|
Alt-A and
other(1)
|
|
|
(116
|
)
|
|
|
(188
|
)
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(279
|
)
|
|
|
(291
|
)
|
Manufactured
housing(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities impairments
|
|
$
|
(133
|
)
|
|
$
|
(693
|
)
|
|
$
|
(826
|
)
|
|
$
|
(15
|
)
|
|
$
|
(279
|
)
|
|
$
|
(294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross Unrealized Loss Position
|
|
|
|
Less than
|
|
|
12 months
|
|
|
|
|
|
Less than
|
|
|
12 months
|
|
|
|
|
|
|
12 months
|
|
|
or greater
|
|
|
Total
|
|
|
12 months
|
|
|
or greater
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime(1)
|
|
$
|
(17
|
)
|
|
$
|
(505
|
)
|
|
$
|
(522
|
)
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
(1
|
)
|
Alt-A and
other(1)
|
|
|
(116
|
)
|
|
|
(188
|
)
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
(319
|
)
|
|
|
(335
|
)
|
Manufactured
housing(1)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
Obligations of state and political
subdivisions(1)
|
|
|
(50
|
)
|
|
|
(18
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities impairments
|
|
$
|
(186
|
)
|
|
$
|
(711
|
)
|
|
$
|
(897
|
)
|
|
$
|
(19
|
)
|
|
$
|
(331
|
)
|
|
$
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represent securities of
private-label or non-agency issuers.
|
During the second quarter of 2008 and 2007, we recorded
impairments related to investments in mortgage-related
securities of $826 million and $294 million,
respectively. The impairments recognized during the second
quarter of 2008 of $826 million related to non-agency
securities backed by subprime or
Alt-A and
other loans, primarily due to significant recent deterioration
in the performance of the collateral underlying these
securities. The primary contributors to the deteriorating
performance during the second quarter were negative delinquency
trends that continued, and in several cases accelerated. Our
securities backed by second lien subprime loans suffered a
pronounced decline in credit enhancement levels. Another
contributor to some of these impairments was credit enhancements
related to monoline bond insurance provided by one monoline
insurer on individual securities in an unrealized loss position
where we have determined that it is both probable a principal
and interest shortfall will occur on the insured securities and
that in such a case there is substantial uncertainty surrounding
the insurers ability to pay all future claims. In making
this determination we considered additional qualitative factors,
such as the monolines availability of capital, ability to
generate new business, pending regulatory actions, ratings
agency actions, security prices, credit default swap levels
traded on the insurer and our own cash flow analysis.
During the six months ended June 30, 2008 and 2007, we
recorded impairments related to investments in mortgage-related
securities of $897 million and $350 million,
respectively. Of the $897 million in impairments recognized
during the six months ended June 30, 2008,
$826 million related to non-agency securities backed by
subprime or Alt-A and other loans as discussed above. Of the
remaining $71 million of impairments, $68 million
related to obligations of states and political subdivisions for
which we did not have the intent to hold to a forecasted
recovery. During the six months ended June 30, 2007,
security impairments on available-for-sale securities included
$347 million attributed to agency mortgage-related
securities in an unrealized loss position that we did not have
the intent to hold to a forecasted recovery. Of the
$347 million, $331 million related to securities where
the duration of the unrealized loss prior to impairment was
greater than 12 months.
We rely on monoline bond insurance, including secondary
coverage, to provide credit protection on some of our securities
held in our mortgage-related investment portfolio as well as our
non-mortgage-related investment portfolio. Monolines are
companies that provide credit insurance principally covering
securitized assets in both the primary issuance and secondary
markets. See CREDIT RISKS Institutional Credit
Risk Mortgage and Bond Insurers and
NOTE 15: CONCENTRATION OF CREDIT AND OTHER
RISKS Mortgage Lenders and Insurers to our
consolidated financial statements for additional information
regarding our credit risks to our counterparties and how we
manage them.
Table 21 shows our non-agency mortgage-related securities
covered by monoline bond insurance at June 30, 2008.
Table 21
Non-Agency Mortgage-Related Securities Covered by Monoline Bond
Insurance at June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Guaranty
|
|
|
XL Capital
|
|
|
AMBAC Assurance
|
|
|
Financial Security
|
|
|
|
|
|
|
|
|
|
Insurance Company
|
|
|
Assurance Inc.
|
|
|
Corporation
|
|
|
Assurance Inc.
|
|
|
MBIA Insurance Corp.
|
|
|
Total
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
principal
|
|
|
Unrealized
|
|
|
principal
|
|
|
Unrealized
|
|
|
principal
|
|
|
Unrealized
|
|
|
principal
|
|
|
Unrealized
|
|
|
principal
|
|
|
Unrealized
|
|
|
principal
|
|
|
Unrealized
|
|
|
|
balance
|
|
|
losses(1)
|
|
|
balance
|
|
|
losses(1)
|
|
|
balance
|
|
|
losses(1)
|
|
|
balance
|
|
|
losses(1)
|
|
|
balance
|
|
|
losses(1)
|
|
|
balance
|
|
|
losses(1)
|
|
|
|
(in millions)
|
|
|
First lien subprime
|
|
$
|
1,423
|
|
|
$
|
218
|
|
|
$
|
251
|
|
|
$
|
62
|
|
|
$
|
895
|
|
|
$
|
215
|
|
|
$
|
548
|
|
|
$
|
55
|
|
|
$
|
31
|
|
|
$
|
2
|
|
|
$
|
3,148
|
|
|
$
|
552
|
|
Second lien subprime
|
|
|
401
|
|
|
|
195
|
|
|
|
84
|
|
|
|
58
|
|
|
|
74
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
16
|
|
|
|
593
|
|
|
|
302
|
|
Alt-A and other
|
|
|
1,191
|
|
|
|
491
|
|
|
|
878
|
|
|
|
387
|
|
|
|
1,938
|
|
|
|
505
|
|
|
|
785
|
|
|
|
173
|
|
|
|
705
|
|
|
|
209
|
|
|
|
5,497
|
|
|
|
1,765
|
|
Manufactured Housing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
25
|
|
|
|
325
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,015
|
|
|
$
|
904
|
|
|
$
|
1,213
|
|
|
$
|
507
|
|
|
$
|
3,032
|
|
|
$
|
769
|
|
|
$
|
1,333
|
|
|
$
|
228
|
|
|
$
|
970
|
|
|
$
|
252
|
|
|
$
|
9,563
|
|
|
$
|
2,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represent the amount of unrealized
losses at June 30, 2008 on the securities with monoline
insurance.
|
Included in Table 21 is $950 million of unpaid
principal balance that was impaired due to our determination
that it was both probable that a principal and interest
shortfall would occur on the insured securities and that in such
a case there is substantial uncertainty surrounding one monoline
insurers ability to pay all future claims, as previously
discussed. For the remaining securities covered by the insurer
that may not have the ability to pay future claims we do not
currently believe that it is probable that a principal or
interest shortfall will occur on these securities. This
assessment requires significant judgment and is subject to
change as our assessments of future performance are updated.
See CREDIT RISKS Institutional Credit
Risk Mortgage and Bond Insurers for a
discussion of our expectations regarding the claims paying
abilities of these insurers and Table 36
Monoline Bond Insurance by Counterparty for the ratings of these
insurers as of July 31, 2008.
Table 22 shows the ratings of available-for-sale non-agency
mortgage-related securities backed by subprime loans held at
June 30, 2008 based on their ratings as of June 30,
2008. Tables 22, 23, 24 and 25 used the lowest rating
available for each security.
Table 22
Ratings of Available-For-Sale Non-Agency Mortgage-Related
Securities backed by Subprime Loans at June 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Gross
|
|
|
Monoline
|
|
|
|
Principal
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Insurance
|
|
Credit Rating as of June 30, 2008
|
|
Balance
|
|
|
Cost
|
|
|
Losses
|
|
|
Coverage(1)
|
|
|
|
(in millions)
|
|
|
Investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
$
|
46,732
|
|
|
$
|
46,703
|
|
|
$
|
(6,351
|
)
|
|
$
|
561
|
|
Other
|
|
|
30,947
|
|
|
|
30,845
|
|
|
|
(6,171
|
)
|
|
|
2,049
|
|
Below investment grade
|
|
|
7,933
|
|
|
|
7,513
|
|
|
|
(2,075
|
)
|
|
|
1,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,612
|
|
|
$
|
85,061
|
|
|
$
|
(14,597
|
)
|
|
$
|
3,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the amount of unpaid
principal balance covered by monoline insurance coverage. This
amount does not represent the maximum amount of losses we could
recover, as the monoline insurance also covers interest.
|
Table 23 shows the percentage of unpaid principal balance
of non-agency mortgage-related securities at June 30, 2008
based on the ratings of available-for-sale non-agency
mortgage-related securities backed by subprime loans as of
June 30 and July 28, 2008. We estimate that the gross
unrealized losses on these securities have not changed
significantly and we continue to receive substantial monthly
remittances of principal repayments on these securities.
Table 23
Ratings of Available-For-Sale Non-Agency Mortgage-Related
Securities backed by Subprime Loans at June 30, 2008 and
July 28, 2008
|
|
|
|
|
|
|
|
|
|
|
Credit Ratings as of
|
|
Percentage of Unpaid Principal Balance at June 30,
2008
|
|
June 30, 2008
|
|
|
July 28, 2008
|
|
|
Investment grade:
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
|
55
|
%
|
|
|
55
|
%
|
Other
|
|
|
36
|
|
|
|
36
|
|
Below investment grade
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Table 24 shows the ratings of available-for-sale non-agency
mortgage-related securities backed by
Alt-A and
other loans held at June 30, 2008 based on their ratings as
of June 30, 2008.
Table
24 Ratings of Available-for-Sale Non-Agency
Mortgage-Related Securities backed by Alt-A and Other Loans at
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Gross
|
|
|
Monoline
|
|
|
|
Principal
|
|
|
|
|
|
Unrealized
|
|
|
Insurance
|
|
Credit Rating as of June 30, 2008
|
|
Balance
|
|
|
Amortized Cost
|
|
|
Losses
|
|
|
Coverage(1)
|
|
|
|
(in millions)
|
|
|
Investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
$
|
43,257
|
|
|
$
|
43,093
|
|
|
$
|
(9,803
|
)
|
|
$
|
1,573
|
|
Other
|
|
|
3,464
|
|
|
|
3,468
|
|
|
|
(1,136
|
)
|
|
|
3,074
|
|
Below investment grade
|
|
|
850
|
|
|
|
787
|
|
|
|
(322
|
)
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,571
|
|
|
$
|
47,348
|
|
|
$
|
(11,261
|
)
|
|
$
|
5,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the amount of unpaid
principal balance covered by monoline insurance coverage. This
amount does not represent the maximum amount of losses we could
recover, as the monoline insurance also covers interest.
|
Table 25 shows the percentage of unpaid principal balance
at June 30, 2008 based on the rating of available-for-sale
non-agency mortgage-related securities backed by
Alt-A and
other loans as of June 30 and July 28, 2008.
Table
25 Ratings of Available-for-Sale Non-Agency
Mortgage-Related Securities backed by Alt-A and Other Loans at
June 30, 2008 and July 28, 2008
|
|
|
|
|
|
|
|
|
|
|
Credit Rating as of
|
|
Percentage of Unpaid Principal Balance at June 30,
2008
|
|
June 30, 2008
|
|
|
July 28, 2008
|
|
|
Investment grade:
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
|
91
|
%
|
|
|
87
|
%
|
Other
|
|
|
7
|
|
|
|
10
|
|
Below investment grade
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Derivative
Assets and Liabilities, Net at Fair Value
Table 26 shows the notional or contractual amounts and fair
value for each derivative type and the maturity profile of the
derivative positions. The fair values of the derivative
positions are presented on a
product-by-product
basis, without netting by counterparty.
Table 26
Derivative Fair Values and Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
Fair
Value(1)
|
|
|
|
Notional or
|
|
|
Total Fair
|
|
|
Less than
|
|
|
1 to 3
|
|
|
Greater than 3
|
|
|
In Excess
|
|
|
|
Contractual Amount
|
|
|
Value(2)
|
|
|
1 Year
|
|
|
Years
|
|
|
and up to 5 Years
|
|
|
of 5 Years
|
|
|
|
(dollars in millions)
|
|
|
Interest-rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
$
|
200,550
|
|
|
$
|
(244
|
)
|
|
$
|
94
|
|
|
$
|
59
|
|
|
$
|
(502
|
)
|
|
$
|
105
|
|
Weighted-average fixed
rate(3)
|
|
|
|
|
|
|
|
|
|
|
4.51
|
%
|
|
|
3.85
|
%
|
|
|
4.08
|
%
|
|
|
4.92
|
%
|
Forward-starting
swaps(4)
|
|
|
44,504
|
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
(159
|
)
|
Weighted-average fixed
rate(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.47
|
%
|
|
|
4.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receive-fixed
|
|
|
245,054
|
|
|
|
(469
|
)
|
|
|
94
|
|
|
|
59
|
|
|
|
(568
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis (floating to floating)
|
|
|
32,205
|
|
|
|
(22
|
)
|
|
|
(1
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
(4
|
)
|
Pay-fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
311,971
|
|
|
|
(2,754
|
)
|
|
|
(70
|
)
|
|
|
(206
|
)
|
|
|
(290
|
)
|
|
|
(2,188
|
)
|
Weighted-average fixed
rate(3)
|
|
|
|
|
|
|
|
|
|
|
5.17
|
%
|
|
|
3.81
|
%
|
|
|
4.43
|
%
|
|
|
4.82
|
%
|
Forward-starting
swaps(4)
|
|
|
99,103
|
|
|
|
(2,737
|
)
|
|
|
|
|
|
|
87
|
|
|
|
(9
|
)
|
|
|
(2,815
|
)
|
Weighted-average fixed
rate(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.35
|
%
|
|
|
5.24
|
%
|
|
|
5.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pay-fixed
|
|
|
411,074
|
|
|
|
(5,491
|
)
|
|
|
(70
|
)
|
|
|
(119
|
)
|
|
|
(299
|
)
|
|
|
(5,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-rate swaps
|
|
|
688,333
|
|
|
|
(5,982
|
)
|
|
|
23
|
|
|
|
(77
|
)
|
|
|
(867
|
)
|
|
|
(5,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option-based:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Call swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
213,897
|
|
|
|
6,685
|
|
|
|
137
|
|
|
|
1,380
|
|
|
|
1,478
|
|
|
|
3,690
|
|
Written
|
|
|
1,500
|
|
|
|
(33
|
)
|
|
|
(4
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
Put swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
21,175
|
|
|
|
660
|
|
|
|
|
|
|
|
81
|
|
|
|
25
|
|
|
|
554
|
|
Written
|
|
|
38,150
|
|
|
|
(414
|
)
|
|
|
(220
|
)
|
|
|
(126
|
)
|
|
|
(68
|
)
|
|
|
|
|
Other option-based
derivatives(5)
|
|
|
103,977
|
|
|
|
942
|
|
|
|
(210
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
1,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total option-based
|
|
|
378,699
|
|
|
|
7,840
|
|
|
|
(297
|
)
|
|
|
1,305
|
|
|
|
1,430
|
|
|
|
5,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures
|
|
|
147,291
|
|
|
|
(64
|
)
|
|
|
(66
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Foreign-currency swaps
|
|
|
15,353
|
|
|
|
4,788
|
|
|
|
65
|
|
|
|
2,530
|
|
|
|
1,564
|
|
|
|
629
|
|
Forward purchase and sale commitments
|
|
|
63,512
|
|
|
|
85
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap guarantee derivatives
|
|
|
1,723
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,294,911
|
|
|
|
6,661
|
|
|
$
|
(190
|
)
|
|
$
|
3,760
|
|
|
$
|
2,127
|
|
|
$
|
964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives
|
|
|
10,116
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,305,027
|
|
|
$
|
6,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fair value is categorized based on
the period from June 30, 2008 until the contractual
maturity of the derivative.
|
(2)
|
The value of derivatives on our
consolidated balance sheets is reported as derivative assets,
net and derivative liability, net, and includes derivative
interest receivable or (payable), net, trade/settle receivable
or (payable), net and derivative cash collateral (held) or
posted, net. Refer to CONSOLIDATED RESULTS OF
OPERATIONS Table 7 Summary of the
Effect of Derivatives on Selected Consolidated Financial
Statement Captions for reconciliation of fair value to the
amounts presented on our consolidated balance sheets as of
June 30, 2008.
|
(3)
|
Represents the notional weighted
average rate for the fixed leg of the swaps.
|
(4)
|
Represents interest-rate swap
agreements that are scheduled to begin on future dates ranging
from less than one year to ten years.
|
(5)
|
Primarily represents purchased
interest rate caps and floors, as well as written options,
including guarantees of stated final maturity of issued
Structured Securities and written call options on PCs we issued.
|
Table 27 summarizes the changes in derivative fair values.
Table 27
Changes in Derivative Fair Values
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
|
(in millions)
|
|
|
Beginning balance net asset (liability)
|
|
$
|
4,790
|
|
|
$
|
7,720
|
|
Net change in:
|
|
|
|
|
|
|
|
|
Forward purchase and sale commitments
|
|
|
(242
|
)
|
|
|
20
|
|
Credit derivatives
|
|
|
14
|
|
|
|
1
|
|
Swap guarantee derivatives
|
|
|
(2
|
)
|
|
|
|
|
Other
derivatives:(2)
|
|
|
|
|
|
|
|
|
Changes in fair value
|
|
|
864
|
|
|
|
(268
|
)
|
Fair value of new contracts entered into during the
period(3)
|
|
|
1,470
|
|
|
|
236
|
|
Contracts realized or otherwise settled during the period
|
|
|
(209
|
)
|
|
|
(839
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance net asset (liability)
|
|
$
|
6,685
|
|
|
$
|
6,870
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The value of derivatives on our
consolidated balance sheets is reported as derivative assets,
net and derivative liability, net, and includes derivative
interest receivable or (payable), net, trade/settle receivable
or (payable), net and derivative cash collateral (held) or
posted, net. Refer to CONSOLIDATED RESULTS OF
OPERATIONS Table 7 Summary of the
Effect of Derivatives on Selected Consolidated Financial
Statement Captions for reconciliation of fair value to the
amounts presented on our consolidated balance sheets as of
June 30, 2008 and January 1, 2008. Fair value excludes
derivative interest receivable, net of $2.3 billion,
trade/settle receivable or (payable), net of $(0.1) billion
and derivative cash collateral held, net of $9.1 billion at
June 30, 2007. Fair value excludes derivative interest
receivable, net of $2.3 billion, trade/settle receivable or
(payable), net of $ billion and derivative cash
collateral held, net of $9.5 billion at January 1,
2007.
|
(2)
|
Includes fair value changes for
interest-rate swaps, option-based derivatives, futures and
foreign-currency swaps and interest-rate caps.
|
(3)
|
Consists primarily of cash premiums
paid or received on options.
|
Table 28 provides information on our outstanding written
and purchased swaption and option premiums at June 30, 2008
and December 31, 2007, based on the original premium
receipts or payments.
Table 28
Outstanding Written and Purchased Swaption and Option
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Premium
|
|
Original Weighted
|
|
|
|
|
Amount (Paid)
|
|
Average Life to
|
|
Remaining Weighted
|
|
|
Received
|
|
Expiration
|
|
Average Life
|
|
|
(dollars in millions)
|
|
Purchased:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008
|
|
$
|
(6,462
|
)
|
|
|
9.4 years
|
|
|
|
7.7 years
|
|
At December 31, 2007
|
|
$
|
(5,478
|
)
|
|
|
7.8 years
|
|
|
|
6.0 years
|
|
Written:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008
|
|
$
|
549
|
|
|
|
1.6 years
|
|
|
|
1.2 years
|
|
At December 31, 2007
|
|
$
|
87
|
|
|
|
3.0 years
|
|
|
|
2.6 years
|
|
|
|
(1)
|
Purchased options exclude callable
swaps.
|
(2)
|
Excludes written options on
guarantees of stated final maturity of Structured Securities.
|
Guarantee
Asset
See CONSOLIDATED RESULTS OF OPERATIONS
Non-Interest Income Gains (Losses) on Guarantee
Asset for a description of, and an attribution of
other changes in, the guarantee asset. Table 29 summarizes
the changes in the guarantee asset balance.
Table 29
Changes in Guarantee Asset
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
9,591
|
|
|
$
|
7,389
|
|
Additions
|
|
|
1,795
|
|
|
|
1,613
|
|
Other(1)
|
|
|
(87
|
)
|
|
|
|
|
Components of fair value gains (losses):
|
|
|
|
|
|
|
|
|
Return of investment on guarantee asset
|
|
|
(951
|
)
|
|
|
(819
|
)
|
Changes in fair value of management and guarantee fees
|
|
|
671
|
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on guarantee asset
|
|
|
(280
|
)
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
11,019
|
|
|
$
|
9,299
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents a reduction in our
guarantee asset associated with the extinguishment of our
previously issued long-term credit guarantees upon conversion
into either PCs or Structured Transactions within the same month.
|
The increase in additions during the six months ended
June 30, 2008 compared to the six months ended
June 30, 2007 is due to an increase in our overall issuance
volume and, to a lesser extent, increases in our management and
guarantee fee rates. Our management and guarantee fee rates for
fixed-rate product increased due to increased
buy-up
activity during the three and six months ended June 30,
2008 as compared to the same periods in 2007.
Gains (losses) on guarantee assets were $(280) million for
the six months ended June 30, 2008 compared to
$297 million for the six months ended June 30, 2007
due to a more significant increase in interest rates during the
six months ended June 30, 2007 as compared to the six
months ended June 30, 2008.
Guarantee
Obligation
See CONSOLIDATED RESULTS OF OPERATIONS
Non-Interest Income Income on Guarantee
Obligation for a description of the components of the
guarantee obligation. Table 30 summarizes the changes in
the guarantee obligation balance.
Table 30
Changes in Guarantee Obligation
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
13,712
|
|
|
$
|
9,482
|
|
Transfer-out to the loan loss
reserve(1)
|
|
|
(12
|
)
|
|
|
|
|
Deferred guarantee income of newly-issued guarantees
|
|
|
2,387
|
|
|
|
2,274
|
|
Other(2)
|
|
|
(127
|
)
|
|
|
|
|
Amortization income:
|
|
|
|
|
|
|
|
|
Static effective yield
|
|
|
(1,261
|
)
|
|
|
(791
|
)
|
Cumulative
catch-up
|
|
|
(677
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
Income on guarantee obligation
|
|
|
(1,938
|
)
|
|
|
(904
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
14,022
|
|
|
$
|
10,852
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents portions of the
guarantee obligation that correspond to incurred credit losses
reclassified to reserve for guarantee losses on PCs.
|
(2)
|
Represents a reduction in our
guarantee obligation associated with the extinguishment of our
previously issued long-term credit guarantees upon conversion
into either PCs or Structured Transactions within the same month.
|
The primary drivers affecting our guarantee obligation balances
are our credit guarantee business volumes, fair values of
performance obligations on new guarantees and liquidation rates
on the existing portfolio. On January 1, 2008, we adopted
SFAS 157, which amended FIN 45. Upon implementation of
SFAS 157, we changed the manner in which we measure the
guarantee obligation we record for all of our newly-issued
guarantees. Effective January 1, 2008, the fair value of
the guarantee obligation for all newly-issued guarantee
contracts is measured as being equal to the total compensation
received for providing the guarantee, as a practical expedient.
Therefore, we no longer recognize losses or defer gains at the
inception for most of our guarantee contracts. However,
guarantee obligations created before January 1, 2008 were
not affected by the adoption of SFAS 157 and will continue
to be subsequently amortized into earnings using a static
effective yield method. For further information regarding
accounting and measurement of our guarantee obligation, see
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Change in Accounting Principles in
the notes to our consolidated financial statements. This change
had a significant positive impact on our financial results for
the three and six months ended June 30, 2008.
Deferred guarantee income of newly-issued guarantees increased
for the six months ended June 30, 2008, compared to the six
months ended June 30, 2007. The increase was primarily a
result of the higher volume of guarantee issuances during the
six months ended June 30, 2008 as compared to the six
months ended June 30, 2007, partially offset by our change
in approach to determining fair value at initial issuance of our
guarantees discussed above. We issued $248 billion and
$232 billion of our PCs and Structured Securities during
the six months ended June 30, 2008 and 2007, respectively.
See CONSOLIDATED RESULTS OF OPERATIONS
Non-Interest Income Income on Guarantee
Obligation for a discussion of amortization income
related to our guarantee obligation.
Total
Stockholders Equity
Total stockholders equity decreased $13.8 billion
during the six months ended June 30, 2008. This decrease
was primarily a result of a net loss of $1.0 billion during
the six months ended June 30, 2008, a $13.0 billion
net decrease in AOCI, and $0.8 billion of common and
preferred stock dividends declared, which was partially offset
by an increase of $1.0 billion to our beginning retained
earnings as a result of the adoption of SFAS 159. The
balance of AOCI at June 30, 2008 was a net loss of
approximately $24.2 billion, net of taxes, compared to a
net loss of $11.1 billion, net of taxes, at
December 31, 2007. The increase in the net loss in AOCI was
primarily attributable to unrealized losses on our non-agency
single-family mortgage-related securities backed by subprime
loans as well as Alt-A and other loans, and commercial
mortgage-backed securities with changes in net unrealized
losses, net of taxes, recorded in AOCI of $11.8 billion for
the six months ended June 30, 2008. In addition, we
reclassified a net gain of $0.9 billion, net of taxes, from
AOCI to retained earnings in adopting SFAS 159 that was
partially offset by the reclassification from AOCI to earnings
of deferred losses related to closed cash flow hedges. See
Retained Portfolio Non-agency
Mortgage-related Securities Backed by Subprime Loans
and Retained Portfolio Non-agency
Mortgage-related Securities Backed by
Alt-A and
Other Loans for more information regarding
mortgage-related securities backed by subprime loans as well as
Alt-A and
other loans.
CONSOLIDATED
FAIR VALUE BALANCE SHEETS ANALYSIS
Our consolidated fair value balance sheets include the estimated
fair values of financial instruments recorded on our
consolidated balance sheets prepared in conformity with GAAP, as
well as off-balance sheet financial instruments that represent
our assets or liabilities that are not recorded on our GAAP
consolidated balance sheets. See NOTE 14: FAIR VALUE
DISCLOSURES Table 14.4 Consolidated
Fair Value Balance Sheets to our consolidated financial
statements for our fair value balance sheets. These off-balance
sheet items predominantly consist of: (a) the unrecognized
guarantee asset and guarantee obligation associated with our PCs
issued through our guarantor swap program prior to the
implementation of FIN 45 in 2003; (b) certain
commitments to purchase mortgage loans; and (c) certain
credit enhancements on manufactured housing asset-backed
securities. The fair value balance sheets also include certain
assets and liabilities that are not financial instruments (such
as property and equipment and REO, which are included in other
assets) at their carrying value in conformity with GAAP. During
the first half of 2008 our fair value results as presented in
our consolidated fair value balance sheets were affected by
several improvements in our approach for estimating the fair
value of certain financial instruments. See CRITICAL
ACCOUNTING POLICIES AND ESTIMATES as well as
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES and NOTE 14: FAIR VALUE
DISCLOSURES to our consolidated financial statements for
more information on fair values.
We use a number of financial models in the preparation of our
consolidated fair value balance sheets. See ITEM 4T.
CONTROLS AND PROCEDURES in this
Form 10-Q
and ITEM 1A. RISK FACTORS and
ITEM 2. FINANCIAL INFORMATION ANNUAL
MD&A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK Interest-Rate Risk and Other
Market Risks in our Registration Statement for information
concerning the risks associated with our use of these models.
Table 31 shows our summary of change in the fair value of
net assets.
Table 31
Summary of Change in the Fair Value of Net Assets
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in billions)
|
|
|
Beginning balance
|
|
$
|
12.6
|
|
|
$
|
31.8
|
|
Changes in fair value of net assets, before capital transactions
|
|
|
(17.4
|
)
|
|
|
0.7
|
|
Capital transactions:
|
|
|
|
|
|
|
|
|
Dividends, share repurchases and issuances, net
|
|
|
(0.8
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(5.6
|
)
|
|
$
|
31.9
|
|
|
|
|
|
|
|
|
|
|
Discussion
of Fair Value Results
During the six months ended June 30, 2008, the fair value
of net assets, before capital transactions, decreased by
$17.4 billion, compared to a $0.7 billion increase
during the six months ended June 30, 2007. See
NOTE 14: FAIR VALUE DISCLOSURES to our
consolidated financial statements for information regarding the
impact of changes in our approach for estimating the fair value
of certain financial instruments, primarily related to our
valuation of our guarantee obligation as a result of the
adoption of SFAS 157 on January 1, 2008 and other
improvements to our methodology. For a further discussion of our
adoption of SFAS 157 and information concerning our
valuation approach related to our guarantee obligation, see
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Change in Accounting Principles to
our consolidated financial statements. The payment of common
stock and preferred stock dividends, net of reissuance of
treasury stock, for the six months ended June 30, 2008
reduced total fair value by $0.8 billion. The fair value of
net assets as of June 30, 2008 was $(5.6) billion,
compared to $12.6 billion as of December 31, 2007.
Our attribution of changes in the fair value of net assets
relies on models, assumptions and other measurement techniques
that evolve over time. The following attribution of changes in
fair value reflects our current estimate of the items presented
(on a pre-tax basis) and excludes the effect of returns on
capital and administrative expenses.
During the six months ended June 30, 2008, our investment
activities decreased fair value by approximately
$16.5 billion. This estimate includes declines in fair
value of approximately $26.9 billion attributable to net
mortgage-to-debt OAS widening. Of this amount, approximately
$20.3 billion was related to the impact of the net
mortgage-to-debt OAS widening on our portfolio of non-agency,
single-family mortgage-related asset-backed securities. The
reduction in fair value was partially offset by our higher core
spread income. Core spread income on our retained portfolio is a
fair value estimate of the net current period accrual of income
from the spread between mortgage-related investments and debt,
calculated on an option-adjusted basis.
Our investment activities decreased fair value by approximately
$0.1 billion during the six months ended June 30,
2007. This estimate includes declines in fair value of
approximately $1.7 billion attributable to the net widening
of mortgage-to-debt OAS.
The impact of mortgage-to-debt OAS widening during the last six
months of 2007 and the six months ended June 30, 2008 and
the resulting fair value losses increases the likelihood that,
in future periods, we will be able to recognize core spread
income at net mortgage-to-debt OAS of approximately 140 to 160
basis points in the long run, as compared to approximately 25 to
35 basis points estimated for the six months ended June 30,
2007. As market conditions change, our estimate of expected fair
value gains from OAS may also change, leading to significantly
different fair value results.
During the six months ended June 30, 2008, our credit
guarantee activities, including our single-family whole loan
credit exposure, decreased fair value by an estimated
$9.2 billion. This estimate includes an increase in the
single-family guarantee obligation of approximately
$9.9 billion, primarily due to a declining credit
environment. This increase in the single-family guarantee
obligation includes a reduction of $7.1 billion in the fair
value of our guarantee obligation recorded on January 1,
2008, as a result of our adoption of SFAS 157.
Our credit guarantee activities increased fair value by
approximately $0.6 billion during the six months ended
June 30, 2007. This increase includes the receipt of cash
primarily related to management, guarantee and other up-front
fees. This increase also includes a fair value increase related
to our single-family guarantee asset of approximately
$2.0 billion, primarily attributable to an increase in
interest rates during the period. These increases were partially
offset by an increase in the fair value of our single-family
guarantee obligation of approximately $2.6 billion due in
part to the increased uncertainty in the mortgage market during
the six months ended June 30, 2007.
LIQUIDITY
AND CAPITAL RESOURCES
Our business activities require that we maintain adequate
liquidity to fund our operations, which may include the need to
make payments upon the maturity, redemption or repurchase of our
debt securities; purchase mortgage loans, mortgage-related
securities and other investments; make payments of principal and
interest on our debt securities and on our PCs and Structured
Securities; make net payments on derivative instruments; pay
dividends on our preferred stock; and, at the discretion of the
Board, pay dividends on our common stock. See RISK
MANAGEMENT AND DISCLOSURE COMMITMENTS for a discussion of
our agreement with OFHEO to maintain and periodically test a
liquidity management and contingency plan. Pursuant to this
agreement, OFHEO periodically assesses the size of our liquidity
portfolio.
We fund our cash requirements primarily by issuing short-term
and long-term debt. Other sources of cash include:
|
|
|
|
|
receipts of principal and interest payments on securities or
mortgage loans we hold;
|
|
|
|
other cash flows from operating activities, including guarantee
activities;
|
|
|
|
borrowings against mortgage-related securities and other
investment securities we hold;
|
|
|
|
sales of securities we hold; and
|
|
|
|
issuances of common and preferred stock.
|
In addition to our other sources of cash, on July 13, 2008,
the Federal Reserve granted the Federal Reserve Bank of New York
the authority to lend to us, if necessary. Any such lending
would be at the primary credit rate and collateralized by U.S.
government and federal agency securities. This authorization was
intended to supplement the Treasurys existing authority to
purchase obligations of Freddie Mac. The Regulatory Reform Act
provides the Secretary of the Treasury with temporary authority,
until December 31, 2009, to purchase any obligations and
other securities we issue under certain circumstances.
Debt
Securities
Table 32 summarizes the par value of the debt securities we
issued, based on settlement dates, during the three and six
months ended June 30, 2008 and 2007. We seek to maintain a
variety of consistent, active funding programs that promote
high-quality coverage by market makers and reach a broad group
of institutional and retail investors. By diversifying our
investor base and the types of debt securities we offer, we
believe we enhance our ability to maintain continuous access to
the debt markets under a variety of market conditions. We
repurchase or call our outstanding debt securities from time to
time to help support the liquidity and predictability of the
market for our debt securities and to manage our mix of
liabilities funding our assets.
Table 32
Debt Security Issuances by Product, at
Par Value(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reference
Bills®
securities and discount notes
|
|
$
|
201,419
|
|
|
$
|
127,846
|
|
|
$
|
384,915
|
|
|
$
|
258,492
|
|
Medium-term notes callable
|
|
|
6,530
|
|
|
|
300
|
|
|
|
10,130
|
|
|
|
2,200
|
|
Medium-term notes non-callable
|
|
|
4,500
|
|
|
|
102
|
|
|
|
4,500
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
|
212,449
|
|
|
|
128,248
|
|
|
|
399,545
|
|
|
|
260,794
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
callable(2)
|
|
|
64,388
|
|
|
|
34,729
|
|
|
|
124,108
|
|
|
|
73,340
|
|
Medium-term notes non-callable
|
|
|
17,044
|
|
|
|
6,951
|
|
|
|
38,042
|
|
|
|
21,215
|
|
U.S. dollar Reference
Notes®
securities non-callable
|
|
|
18,000
|
|
|
|
12,000
|
|
|
|
32,000
|
|
|
|
29,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
99,432
|
|
|
|
53,680
|
|
|
|
194,150
|
|
|
|
123,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities issued
|
|
$
|
311,881
|
|
|
$
|
181,928
|
|
|
$
|
593,695
|
|
|
$
|
384,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Exclude securities sold under
agreements to repurchase and federal funds purchased, lines of
credit and securities sold but not yet purchased.
|
(2)
|
For the second quarter of 2008 and
2007, there were $7.2 billion and $ accounted for as
debt exchanges, respectively. For the six months ended
June 30, 2008 and 2007, there were $7.2 billion and
$ accounted for as debt exchanges, respectively.
|
Subordinated
Debt
During the second quarter of 2008, we did not call or issue any
Freddie
SUBS®
securities. At both June 30, 2008 and December 31,
2007, the balance of our subordinated debt outstanding was
$4.5 billion. Our subordinated debt in the form of Freddie
SUBS®
securities is a component of our risk management and disclosure
commitments with OFHEO (described in RISK MANAGEMENT AND
DISCLOSURE COMMITMENTS).
Credit
Ratings
Our ability to access the capital markets and other sources of
funding, as well as our cost of funds, is highly dependent upon
our credit ratings. Table 33 indicates our credit ratings
at August 1, 2008.
Table 33
Freddie Mac Credit Ratings
|
|
|
|
|
|
|
|
|
Nationally Recognized Statistical
|
|
|
Rating Organization
|
|
|
Standard & Poors
|
|
Moodys
|
|
Fitch
|
|
Senior long-term
debt(1)
|
|
AAA
|
|
Aaa
|
|
AAA
|
Short-term
debt(2)
|
|
A-1+
|
|
P-1
|
|
F1+
|
Subordinated
debt(3)
|
|
AA/Negative Watch
|
|
Aa2
|
|
AA
|
Preferred stock
|
|
AA/Negative Watch
|
|
A1/Review for Downgrade
|
|
A+/Negative Watch
|
|
|
(1)
|
Consists of medium-term notes, U.S.
dollar Reference
Notes®
securities and Reference
Notes®
securities.
|
(2)
|
Consists of Reference
Bills®
securities and discount notes.
|
(3)
|
Consists of Freddie
SUBS®
securities only.
|
A security rating is not a recommendation to buy, sell or hold
securities. It may be subject to revision or withdrawal at any
time by the assigning rating organization. Each rating should be
evaluated independently of any other rating.
Equity
Securities
See Core Capital and PART II ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS for information about issuances of our equity
securities in the second quarter of 2008.
Cash and
Investments Portfolio
We maintain a cash and investments portfolio that is important
to our financial management and our ability to provide liquidity
and stability to the mortgage market. At June 30, 2008, the
investments in this portfolio consisted of liquid
non-mortgage-related securities that we could sell or finance to
provide us with an additional source of liquidity to fund our
business operations. We also use this portfolio to help manage
recurring cash flows and meet our other cash management needs.
In addition, we use the portfolio to hold capital on a temporary
basis until we can deploy it into retained portfolio investments
or credit guarantee opportunities. We may also sell or finance
the securities in this portfolio to maintain capital reserves to
meet mortgage-funding needs, provide diverse sources of
liquidity or help manage the interest-rate risk inherent in
mortgage-related assets. During the six months ended
June 30, 2008, we increased the balance of our cash and
investments portfolio by $21.5 billion, which we expect to
use as an additional source of liquidity to fund our business
operations in the third quarter of 2008.
Retained
Portfolio
Our retained portfolio assets are a significant capital resource
and can be used as a source of funding, if needed. However,
during the six months ended June 30, 2008, the market for
non-agency securities backed by subprime and Alt-A mortgages
continued to experience a significant reduction in liquidity and
wider spreads, as investor demand for these assets
decreased. During the six months ended June 30, 2008, the
percentages of our non-agency securities backed by subprime
mortgages that were AAA-rated and the total rated as investment
grade, based on the lowest rating available, decreased from 96%
to 55% and from 100% to 91%, respectively. In addition, during
the six months ended June 30, 2008, the percentages of our
non-agency securities backed by
Alt-A and
other mortgages that were
AAA-rated
and the total rated as investment grade, based on the lowest
rating available, decreased from 100% to 91% and from 100% to
98%, respectively. We expect these trends to continue in the
near future. These market conditions limit the availability of
these assets as a source of funds; however, we continue to
receive substantial monthly remittances from the underlying
collateral. In addition, we have the ability and intent to hold
these securities until recovery and, other than certain mortgage
related securities primarily backed by subprime loans and
Alt-A and
other loans where we have already realized
other-than-temporary
impairments, we do not currently expect the cash flows from
these securities to negatively impact our liquidity. See
CONSOLIDATED BALANCE SHEETS ANALYSIS Retained
Portfolio for more information.
Cash
Flows
Our cash and cash equivalents increased $35.0 billion to
$43.6 billion during the six months ended June 30,
2008 resulting primarily from the designation of commercial
paper with original maturities of three months or less as cash
equivalents. Cash flows used for operating activities during the
six months ended June 30, 2008 were $4.5 billion,
which primarily reflected a reduction in cash as a result of
increases in purchases of held-for-sale mortgage loans, and a
net loss of $1.0 billion. Cash flows used for investing
activities for the six months ended June 30, 2008 were
$56.9 billion, primarily due to net increases in our
trading securities partially offset by net cash proceeds from
our available-for-sale securities in our investment portfolio.
Cash flows provided by financing activities for the six months
ended June 30, 2008 were $96.3 billion, largely
attributable to proceeds from the issuance of debt securities,
net of repayments.
SFAS 159 requires the classification of trading securities
cash flows based on the purpose for which the securities were
acquired. Upon adoption of SFAS 159, effective
January 1, 2008, we classified our trading securities cash
flows as investing activities because we intend to hold these
securities for investment purposes. Prior to our adoption of
SFAS 159, we classified cash flows on all trading
securities as operating activities. As a result, the operating
and investing activities on our consolidated statements of cash
flows have been impacted by this change.
Our cash and cash equivalents increased $0.4 billion to
$11.8 billion during the six months ended June 30,
2007. Cash flows provided by operating activities during the six
months ended June 30, 2007 were $2.3 billion, which
primarily reflected an increase in our liabilities to PC
investors and net income of $0.6 billion. Cash flows used
for investing activities for the six months ended June 30,
2007 were $6.7 billion, primarily due to a net increase in
securities purchased under agreements to resell and federal
funds sold. Cash flows provided by financing activities for the
six months ended June 30, 2007 were $4.8 billion,
largely attributable to the net proceeds from the net issuance
of long-term debt and the net issuance of preferred stock.
Capital
Adequacy
On March 19, 2008, OFHEO, Fannie Mae and Freddie Mac
announced an initiative to increase mortgage market liquidity.
In conjunction with this initiative, OFHEO reduced our mandatory
target capital surplus to 20% above our statutory minimum
capital requirement, and we announced that we will begin the
process to raise capital and maintain overall capital levels
well in excess of requirements while the mortgage markets
recover. We estimated at June 30, 2008 that we exceeded
each of our regulatory capital requirements, in addition to the
20% mandatory target capital surplus.
On May 14, 2008, we announced our commitment to raise
$5.5 billion of new core capital through one or more
offerings, which will likely include both common or common
equivalent and preferred securities. The timing, amount and mix
of securities to be offered will depend on a variety of factors,
including prevailing market conditions, and is subject to
approval by our board of directors. OFHEO has informed us that,
upon completion of these offerings, our mandatory target capital
surplus will be reduced from 20% to 15%. OFHEO has also informed
us that it intends a further reduction of our mandatory target
capital surplus from 15% to 10% upon the combination of
completion of our SEC registration process, which we completed
on July 18, 2008, our completion of the remaining Consent
Order requirement (i.e., the separation of the positions
of Chairman and Chief Executive Officer), our continued
commitment to maintain capital well above OFHEOs
regulatory requirement and no material adverse changes to
ongoing regulatory compliance.
The sharp decline in the housing market and volatility in
financial markets continued to adversely affect our capital,
including our ability to manage to our regulatory capital
requirements and the 20% mandatory target capital surplus.
Factors that could adversely affect the adequacy of our capital
in future periods include our ability to execute capital raising
transactions; GAAP net losses; continued declines in home
prices; increases in our credit and interest-rate risk profiles;
adverse changes in interest-rates, the yield curve or implied
volatility; adverse OAS changes; impairments of non-agency
mortgage-related securities; downgrades of non-agency
mortgage-related securities (with respect to regulatory
risk-based capital); counterparty downgrades; legislative or
regulatory actions that increase capital requirements; or
changes in accounting practices or standards. See
ITEM 1. FINANCIAL INFORMATION
NOTE 9: REGULATORY CAPITAL to
our consolidated financial statements for further information
regarding our regulatory capital requirements and
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 9: REGULATORY
CAPITAL in our Registration Statement for further
information regarding OFHEOs capital monitoring framework.
Under current OFHEO regulations, the regulatory risk based
capital standard in particular is highly sensitive to underlying
drivers, including house price changes (based on OFHEOs
all transaction index); downgrades of non-agency
mortgage-related securities; counterparty downgrades; retained
portfolio growth; the duration, term and optionality of our
funding and hedging instruments; and other factors. While we
have historically met the risk-based capital standard, there is
a significant possibility that continued adverse developments in
relation to one or more of these underlying drivers could cause
us to fail to meet this standard. If we were not to meet the
risk-based capital standard, we would be classified as
undercapitalized by OFHEO. See ITEM 1.
BUSINESS REGULATION AND SUPERVISION
Office of Federal Housing Enterprise Oversight
Capital Standards and Dividend Restrictions and
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 9: REGULATORY
CAPITAL Classification in our Registration
Statement for information regarding potential actions OFHEO may
seek to take in that event. Under the Regulatory Reform Act,
FHFA is charged with developing risk-based capital requirements
by regulation. The nature of the requirements FHFA may
eventually adopt pursuant to this authority is currently
uncertain.
We expect to take actions to maintain our capital position above
the mandatory target surplus. Accordingly, subject to approval
by our board of directors, we currently expect to reduce the
dividend on our common stock in the third quarter of 2008 from
$0.25 to $0.05 or less per share and to pay the full dividends
at contractual rates on our preferred stock. In addition, we
continue to review and consider other alternatives for managing
our capital including issuing equity in amounts that could be
substantial and materially dilutive to our existing
shareholders, reducing or rebalancing risk, slowing purchases
into our credit guarantee portfolio, and limiting the growth or
reducing the size of our retained portfolio by allowing the
portfolio to run off and/or by selling securities classified as
trading or carried at fair value under SFAS 159 or
available-for-sale securities that are accretive to capital
(i.e., fair value exceeds amortized cost). We have
retained and are working with financial advisors and we continue
to engage in discussions with OFHEO and Treasury on these
matters.
Our ability to execute any of these actions or their
effectiveness may be limited and we might not be able to manage
to our regulatory capital requirements, including the mandatory
target capital surplus. If we are not able to manage to the
mandatory target capital surplus, OFHEO may, among other things,
seek to require us to (a) submit a plan for remediation or
(b) take other remedial steps. In addition, OFHEO has
discretion to reduce our capital classification by one level if
OFHEO determines that we are engaging in conduct that could
result in a rapid depletion of core capital or determines that
the value of property subject to mortgage loans we hold or
guarantee has decreased significantly. See
PART II ITEM 1A. RISK FACTORS
in this
Form 10-Q
and ITEM 1. BUSINESS
REGULATION AND SUPERVISION Office of Federal
Housing Enterprise Oversight Capital Standards
and Dividend Restrictions and
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 9: REGULATORY
CAPITAL Classification in our Registration
Statement for information regarding additional potential actions
OFHEO may seek to take against us. See EXECUTIVE
SUMMARY Legislative and Regulatory
Matters Government Sponsored Enterprise, or GSE,
Oversight Legislation in this Form 10-Q for
information regarding the enhanced regulatory authorities FHFA
now possesses.
Core
Capital
During the six months ended June 30, 2008, our core capital
decreased approximately $0.7 billion. This decrease was
primarily a result of common and preferred stock dividends
declared of $0.8 billion and a net loss of
$1.0 billion, which was partially offset by an increase of
$1.0 billion to our beginning retained earnings as a result
of the adoption of SFAS 159. See NOTE 1: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Change in
Accounting Principles to our consolidated financial
statements for further information regarding the impact of
implementation of SFAS 159.
CREDIT
RISKS
Our credit guarantee portfolio is subject primarily to two types
of credit risk: institutional credit risk and mortgage credit
risk. Institutional credit risk is the risk that a counterparty
that has entered into a business contract or arrangement with us
will fail to meet its obligations. Mortgage credit risk is the
risk that a borrower will fail to make timely payments on a
mortgage or security we own or guarantee. We are exposed to
mortgage credit risk on our total mortgage portfolio because we
either hold the mortgage assets or have guaranteed mortgages in
connection with the issuance of a PC, Structured Security or
other borrower performance commitment.
Mortgage and credit market conditions deteriorated in the second
half of 2007 and have continued to deteriorate throughout the
first half of 2008. Factors negatively affecting the mortgage
and credit markets in recent months include:
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lower levels of liquidity in institutional credit markets;
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wider credit spreads;
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rating agency downgrades of mortgage-related securities or
counterparties;
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declines in home prices nationally;
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higher incidence of institutional insolvencies; and
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higher levels of foreclosures and delinquencies, particularly
with respect to non-traditional and subprime mortgage loans.
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Institutional
Credit Risk
Our primary institutional credit risk exposure arises from
agreements with:
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derivative counterparties;
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mortgage seller/servicers;
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mortgage insurers;
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issuers, guarantors or third-party providers of credit
enhancements (including bond insurers); and
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mortgage investors.
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A significant failure to perform by a major entity in one of
these categories could have a material adverse effect on our
retained portfolio, cash and investments portfolio or credit
guarantee activities. The recent challenging market conditions
have adversely affected, and are expected to continue to
adversely affect, the liquidity and financial condition of a
number of our counterparties. For example, some of our largest
mortgage seller/servicers and mortgage insurers have experienced
ratings downgrades and liquidity constraints and other
counterparties may also experience these concerns. The weakened
financial condition and liquidity position of some of our
counterparties may adversely affect their ability to perform
their obligations to us, or the quality of the services that
they provide to us. Consolidation in the industry could further
increase our exposure to individual counterparties. In addition,
any efforts we take to reduce exposure to financially weakened
counterparties could result in increased exposure among a
smaller number of institutions. The failure of any of our
primary counterparties to meet their obligations to us could
have a material adverse effect on our results of operations and
financial condition.
Investments in our retained portfolio expose us to institutional
credit risk on non-Freddie Mac mortgage-related securities to
the extent that servicers, issuers, guarantors or third parties
providing credit enhancements become insolvent or do not
perform. Our non-Freddie Mac mortgage-related securities
portfolio consists of both agency and non-agency
mortgage-related securities. Agency securities present minimal
institutional credit risk due to the prevailing view that these
securities have a credit quality at least equivalent to
non-agency securities rated AAA (based on S&P or equivalent
rating scale of other nationally recognized statistical rating
organizations). We seek to manage institutional credit risk on
non-Freddie Mac mortgage-related securities by only purchasing
securities that meet our investment guidelines and performing
ongoing analysis to evaluate the creditworthiness of the issuers
and servicers of these securities and the bond insurers that
guarantee them. See CONSOLIDATED BALANCE SHEETS
ANALYSIS Table 15 Characteristics
of Mortgage Loans and Mortgage-Related Securities in our
Retained Portfolio for more information on non-Freddie Mac
securities within our retained portfolio.
Institutional credit risk also arises from the potential
insolvency or non-performance of issuers or guarantors of
investments held in our cash and investments portfolio.
Instruments in this portfolio are investment grade at the time
of purchase and primarily short-term in nature, thereby
substantially mitigating institutional credit risk in this
portfolio. We regularly evaluate these investments to determine
if any impairment in fair value requires an impairment loss
recognition in earnings, warrants divestiture or requires a
combination of both.
Derivative
Counterparty Credit Risk
Our use of over-the-counter, or OTC, interest-rate swaps,
option-based derivatives and foreign-currency swaps is subject
to rigorous internal credit and legal reviews. Our derivative
counterparties carry external credit ratings among the highest
available from major rating agencies. All of these
counterparties are major financial institutions and are
experienced participants in the OTC derivatives market.
Table 34 summarizes our exposure to counterparty credit
risk in our derivatives, which represents the net positive fair
value of derivative contracts, related accrued interest and
collateral held by us from our counterparties, after netting by
counterparty as applicable (i.e., net amounts due to us
under derivative contracts).
Table 34
Derivative Counterparty Credit Exposure
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June 30, 2008
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Weighted Average
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Notional or
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Total
|
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Exposure,
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Contractual
|
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Number of
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Contractual
|
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Exposure at
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Net of
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Maturity
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Collateral Posting
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Rating(1)
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Counterparties(2)
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Amount
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Fair
Value(3)
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Collateral(4)
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(in years)
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Threshold
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(dollars in millions)
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AAA
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1
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$
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500
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$
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$
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7.3
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Mutually agreed upon
|
AA+
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2
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91,829
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783
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66
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5.6
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$10 million or less
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AA
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8
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474,501
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2,667
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123
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6.9
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$10 million or less
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AA
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7
|
|
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182,022
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2,951
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12
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5.8
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$10 million or less
|
A+
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2
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37,941
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27
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1
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6.0
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$1 million or less
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A
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5
|
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147,233
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1,927
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|
|
161
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6.8
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$1 million or less
|
A
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1
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15
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0.0
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$1 million or less
|
BBB+
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1
|
|
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39,807
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|
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|
139
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7
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5.3
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None
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Subtotal(5)
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27
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973,848
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8,494
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370
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6.5
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Other
derivatives(6)
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265,944
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Forward purchase and sale commitments
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63,512
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233
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233
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Swap guarantee derivatives
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1,723
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Total derivatives
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$
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1,305,027
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$
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8,727
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$
|
603
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|
December 31, 2007
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Weighted Average
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Total
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Exposure,
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Contractual
|
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Number of
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Notional
|
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Exposure at
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Net of
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Maturity
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Collateral Posting
|
Rating(1)
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Counterparties(2)
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Amount
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Fair
Value(3)
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Collateral(4)
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(in years)
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Threshold
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(dollars in millions)
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AAA
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2
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$
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1,173
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$
|
174
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|
$
|
174
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3.4
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Mutually agreed upon
|
AA+
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3
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180,939
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|
945
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4.4
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$10 million or less
|
AA
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|
9
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463,163
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1,347
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|
62
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|
5.3
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$10 million or less
|
AA−
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|
6
|
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160,678
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|
2,230
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|
|
|
30
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|
|
|
5.8
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$10 million or less
|
A+
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5
|
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168,680
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|
1,770
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|
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|
54
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6.1
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$1 million or less
|
A
|
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|
2
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|
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35,391
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|
239
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|
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|
19
|
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|
5.7
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$1 million or less
|
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Subtotal(5)
|
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27
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|
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|
1,010,024
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|
|
|
6,705
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|
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|
339
|
|
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|
5.4
|
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|
Other
derivatives(6)
|
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|
|
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|
238,893
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|
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|
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|
|
|
|
|
|
|
|
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|
Forward purchase and sale commitments
|
|
|
|
|
|
|
72,662
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|
|
|
465
|
|
|
|
465
|
|
|
|
|
|
|
|
Swap guarantee derivatives
|
|
|
|
|
|
|
1,302
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|
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|
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|
|
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|
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|
|
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Total derivatives
|
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|
|
|
$
|
1,322,881
|
|
|
$
|
7,170
|
|
|
$
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1)
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We use the lower of S&P and
Moodys ratings to manage collateral requirements. In this
table, the rating of the legal entity is stated in terms of the
S&P equivalent.
|
(2)
|
Based on legal entities. Affiliated
legal entities are reported separately.
|
(3)
|
For each counterparty, this amount
includes derivatives with a net positive fair value (recorded as
derivative assets, net), including the related accrued interest
receivable/payable (net).
|
(4)
|
Total Exposure at Fair Value less
collateral held as determined at the counterparty level.
|
(5)
|
Consists of OTC derivative
agreements for interest-rate swaps, option-based derivatives
(excluding written options), foreign-currency swaps and
purchased interest-rate caps. Written options do not present
counterparty credit exposure, because we receive a one-time
up-front premium in exchange for giving the holder the right to
execute a contract under specified terms, which generally puts
us in a liability position.
|
(6)
|
Consists primarily of
exchange-traded contracts, certain written options and certain
credit derivatives.
|
As indicated in Table 34, approximately 96% of our
counterparty credit exposure for OTC interest-rate swaps,
certain option-based derivatives and foreign-currency swaps was
collateralized at June 30, 2008. To date, we have not
incurred any credit losses on OTC derivative counterparties or
set aside specific reserves for institutional credit risk
exposure. We do not believe such reserves are necessary, given
our counterparty credit risk management policies and collateral
requirements. At June 30, 2008, the counterparty rated BBB+
reflects a downgrade of an existing counterparty, which occurred
during 2008.
Additionally, as indicated in Table 34, the total exposure
to our forward purchase and sale commitments of
$233 million at June 30, 2008 was uncollateralized.
Because the typical maturity of our forward purchase and sale
commitments is less than 60 days and they are generally
settled through a clearinghouse, we do not require master
netting and collateral agreements for the counterparties of
these commitments. However, we monitor the credit fundamentals
of the counterparties to our forward purchase and sale
commitments on an ongoing basis to ensure that they continue to
meet our internal risk-management standards.
Our
Customers Mortgage Seller/Servicers
We acquire a significant portion of our mortgage loans from
several large lenders. These lenders are among the largest
mortgage loan originators in the U.S. We are exposed to
institutional credit risk arising from the insolvency or
non-performance by our mortgage seller/servicers, including
non-performance of their repurchase obligations arising from the
representations and warranties made to us for loans they
underwrote and sold to us. The credit risk associated with
servicing relates to whether we could transfer the applicable
servicing rights to a successor servicer and recover amounts
owed to us by the defaulting servicer in the event the
defaulting servicer does not fulfill its responsibilities. We
believe that the value of
those servicing rights generally would provide us with
significant protection against our exposure to a
seller/servicers failure to perform its repurchase
obligations. We have contingency procedures in place that are
intended to provide for a timely transfer of current servicing
information in the event one of our major counterparties is no
longer able to fulfill its servicing responsibilities. However,
due to the significant size of the mortgage-servicing portfolios
of some of our major customers relative to the servicing
capacity of the market, the failure of one of our major
servicers could adversely affect our ability to conduct
operations in a timely manner. In order to manage the credit
risk associated with our mortgage seller/servicers, we require
them to meet minimum financial capacity standards, insurance and
other eligibility requirements. We conduct periodic operational
reviews of our single-family mortgage seller/servicers to help
us better understand their control environment and its impact on
the quality of mortgage loans sold to us and the quality of the
servicing of those loans. See NOTE 15: CONCENTRATION
OF CREDIT AND OTHER RISKS to our consolidated financial
statements for additional information on our mortgage
seller/servicers and our mortgage credit risks.
Under our agreements with lenders, we have the right to request
that lenders repurchase mortgages sold to us if those mortgages
do not comply with those agreements. As a result, our
seller/servicers repurchase mortgages sold to us, or indemnify
us against losses on those mortgages, whether we subsequently
securitized the loans or held them in our retained portfolio.
During the six months ended June 30, 2008 and 2007, the
aggregate unpaid principal balance of single-family mortgages
repurchased by our seller/servicers (without regard to year of
original purchase) was approximately $737 million and
$323 million, respectively. When a seller/servicer
repurchases a mortgage that is securitized by us, our related
guarantee asset and obligation are extinguished similar to any
other form of liquidation event for our PCs. However, when we
exercise our recourse provisions due to misrepresentation by the
seller for loans that have already been repurchased by us under
our performance guarantee, we remove the carrying value of our
related mortgage asset and recognize recoveries on loans
impaired upon purchase.
Mortgage
and Bond Insurers
We have institutional credit risk relating to the potential
insolvency or non-performance of mortgage and bond insurers that
insure mortgages and securities we purchase or guarantee. We
manage this risk by establishing eligibility standards for
mortgage insurers and by regularly monitoring our exposure to
individual mortgage and bond insurers. Our monitoring includes
regularly performing analysis of the estimated financial
capacity of these insurers under different adverse economic
conditions. We also monitor the insurers credit ratings,
as provided by nationally recognized statistical rating
organizations, and we periodically review the methods used by
those organizations. Recently, many of our large insurers have
been downgraded by nationally recognized statistical rating
organizations. We periodically perform
on-site
reviews of mortgage insurers to confirm compliance with our
eligibility requirements and to evaluate their management and
control practices. In addition, state insurance authorities
regulate insurers.
Although we monitor the financial strength of our mortgage and
bond insurers, we also place emphasis on the analysis of ratings
agencies to evaluate claims paying ability and the capital
strength of the firms. As a guarantor, we remain responsible for
the payment of principal and interest if a mortgage insurer
fails to meet its obligations to reimburse us for claims. If any
of our mortgage insurers that provides credit enhancement fails
to fulfill its obligation, the result could be increased
credit-related costs and a possible reduction in the fair values
associated with our PCs or Structured Securities. Table 35
presents our exposure to mortgage insurers, excluding bond
insurance, as of June 30, 2008.
Table 35
Mortgage Insurance by Counterparty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
S&P Credit
|
|
S&P Credit
|
|
Primary
|
|
|
Pool
|
|
|
Maximum
|
|
Counterparty Name
|
|
Rating(1)
|
|
Rating Outlook
|
|
Insurance(2)
|
|
|
Insurance(2)
|
|
|
Exposure(3)
|
|
|
|
(dollars in billions)
|
|
|
Mortgage Guaranty Insurance Corp. (MGIC)
|
|
A
|
|
|
Negative
|
|
|
$
|
58
|
|
|
$
|
52
|
|
|
$
|
16
|
|
Radian Guaranty Inc.
|
|
A
|
|
|
Negative
|
|
|
|
40
|
|
|
|
25
|
|
|
|
12
|
|
Genworth Mortgage Insurance Corporation
|
|
AA
|
|
|
Negative
|
|
|
|
41
|
|
|
|
1
|
|
|
|
10
|
|
PMI Mortgage Insurance Co. (PMI)
|
|
A+
|
|
|
Negative
|
|
|
|
30
|
|
|
|
5
|
|
|
|
8
|
|
United Guaranty Residential Insurance Co.
|
|
AA+
|
|
|
Negative
|
|
|
|
32
|
|
|
|
1
|
|
|
|
8
|
|
Republic Mortgage Insurance (RMIC)
|
|
AA−
|
|
|
Negative
|
|
|
|
26
|
|
|
|
4
|
|
|
|
7
|
|
Others(4)
|
|
|
|
|
|
|
|
|
18
|
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
245
|
|
|
$
|
93
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Latest rating available as of
July 31, 2008.
|
(2)
|
Represents the amount of unpaid
principal balance at the end of the period for single-family
mortgages in our retained portfolio and backing our issued PCs
and Structured Securities covered by the respective insurance
type.
|
(3)
|
Represents the remaining
contractual limit for reimbursement of losses of principal
incurred on the aggregate policies of both primary and pool
insurance. These amounts are based on our gross coverage without
regard to netting of coverage that may exist on some of the
related mortgages for double-coverage under both types of
insurance.
|
(4)
|
No remaining counterparty
represents greater than 10% of our total maximum exposure.
|
For our exposure to mortgage insurers, we evaluate the recovery
from these insurance policies for mortgage loans in our retained
portfolio as well as loans underlying our PCs and Structured
Securities as part of the estimate of our provision for
credit losses. To date, downgrades of insurer financial strength
ratings and our evaluation of remediation plans provided by our
counterparties have not affected our provision for credit loss;
however, we have reflected expectations of unrecoverable claims
in our fair value estimates of our guarantee obligation during
the second quarter of 2008. See CONSOLIDATED RESULTS OF
OPERATIONS Provision for Credit Loss for
further information.
Based upon currently available information, we expect that most
of our mortgage insurance counterparties possess adequate
financial strength and capital to meet their obligations to us
for the near term. On June 19, 2008, Triad Guaranty
Insurance Corporation, or Triad, which is included in
Others on Table 35 above, announced that it
would cease issuing new insurance business effective
July 15, 2008. In accordance with our insurer eligibility
requirements, we suspended our rating of Triad as a
Type-I,
approved insurer on May 14, 2008, subsequently denied
Triads appeal of our suspension and on June 19, 2008
informed our customers that mortgages with commitments of
insurance from Triad dated after July 14, 2008 are not
eligible for sale to us. For an insurer to be designated by us
as Type-I
the company must be rated by at least two of the following three
rating agencies S&P, Moodys, and Fitch,
and must not receive a rating less than AA−/Aa3 by any
listed rating agency. We also reviewed the remediation plans for
returning to
Type-I
status provided by each of MGIC, Radian Guaranty Inc. and PMI
after their downgrades below AA. We have determined, based on
those plans, to continue to treat their eligibility as if they
were a
Type-I,
approved insurer. On June 27, 2008, Republic Mortgage
Insurance Company was downgraded below the AA-category by one
rating agency and has committed to providing us, within sixty
days of that date, a remediation plan for returning to Type-I
status.
We primarily have exposure to monoline bond insurers when we
purchase a security with insurance owned by the trust issuing
the security. For this type of exposure, our potential losses
are reflected through declines in the fair value of the
security. We also have exposure to monolines when we purchase
additional credit protection (i.e., insurance) directly
from the monolines to mitigate a portion of the credit risk on
certain of our non-agency mortgage-related securities in our
retained portfolio. We evaluate the recovery from these
insurance policies as part of our impairment analysis for
securities within our retained portfolio. We recognized
impairment during the second quarter of 2008 on certain of these
securities covered by one of our monoline bond insurers. See
CONSOLIDATED BALANCE SHEET ANALYSIS Retained
Portfolio for more information on our impairment analysis
of securities covered by monoline bond insurance. Table 36
presents our coverage amounts of monoline bond insurance,
including secondary coverage, for securities held in our
retained portfolio and non-mortgage-related investments in our
cash and investments portfolio, on a combined basis.
Table 36
Monoline Bond Insurance by Counterparty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
S&P Credit
|
|
S&P Credit
|
|
Coverage
|
|
|
Percent
|
|
Counterparty Name
|
|
Rating(1)
|
|
Rating Outlook
|
|
Outstanding(2)
|
|
|
of Total
|
|
|
|
(dollars in billions)
|
|
|
Ambac Assurance Corporation
|
|
|
AA
|
|
|
|
Negative
|
|
|
$
|
6
|
|
|
|
37
|
%
|
FGIC
|
|
|
BB
|
|
|
|
Negative
|
|
|
|
3
|
|
|
|
19
|
|
MBIA Insurance Corp.
|
|
|
AA
|
|
|
|
Negative
|
|
|
|
4
|
|
|
|
21
|
|
Financial Security Assurance Inc.
|
|
|
AAA
|
|
|
|
Stable
|
|
|
|
2
|
|
|
|
14
|
|
Others(3)
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
17
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Latest rating available as of
July 31, 2008.
|
(2)
|
Represents the contractual limit
for reimbursement of losses incurred on non-agency
mortgage-related securities held in our retained portfolio and
non-mortgage securities in our cash and investment portfolio.
|
(3)
|
No remaining counterparty
represents greater than 10% of our total coverage outstanding.
|
In accordance with our risk management policies we will continue
to actively monitor the financial strength of our mortgage and
bond insurers and take appropriate actions, as considered
necessary in this challenging market environment. In the event
one or more of our mortgage or bond insurers were to become
insolvent it is possible that we would not collect all of our
claims from the affected insurer and it may impact our ability
to recover certain unrealized losses on our retained portfolio
or recoveries associated with credit losses in our guaranteed
PCs and Structured Securities. To date, no mortgage or bond
insurer has failed to meet its obligations to us.
Mortgage
Credit Risk
Mortgage credit risk is primarily influenced by the credit
profile of the borrower on the mortgage, the features of the
mortgage itself, the type of property securing the mortgage and
the general economic environment. To manage our mortgage credit
risk, we focus on three key areas: underwriting requirements and
quality control standards; portfolio diversification; and
portfolio management activities, including loss mitigation and
the use of credit enhancements.
All mortgages that we purchase for our retained portfolio or
that we guarantee have an inherent risk of default. We seek to
manage the underlying risk by adequately pricing for the risk we
assume using our underwriting and quality control processes. Our
underwriting process evaluates mortgage loans using several
critical risk characteristics, such as credit score, LTV ratio
and occupancy type.
Underwriting
and quality control standards
We use a process of delegated underwriting for the single-family
mortgages we purchase or securitize. In this process, we provide
originators with a series of mortgage underwriting standards and
the originators represent and warrant to us that the mortgages
sold to us meet these requirements. We subsequently review a
sample of these loans and, if we determine that any loan is not
in compliance with our contractual standards, we may require the
seller/servicer to repurchase that mortgage or make us whole in
the event of a default. In response to the changes in the
residential mortgage market during the last year, we made
changes to our underwriting guidelines in early 2008, with which
our seller/servicers must comply for loans delivered to us for
purchase or securitization. These changes will result in our
reducing purchases of mortgages with LTV ratios over 95%, and
limiting combinations of higher-risk characteristics in loans we
purchase, including those with reduced documentation. We have
also reduced maximum LTV ratios for certain cash-out refinance
and investment property mortgages to 90% or less, depending on
the number of units in the property and the presence of
secondary financing. In some cases, binding commitments under
existing customer contracts may delay the effective dates of
underwriting adjustments. We expect that the changes we have
made to our underwriting guidelines will improve the credit
profile of the mortgages that are delivered to us and have a
positive impact on our credit risk exposure going forward.
In response to market needs, the Economic Stimulus Act of 2008
temporarily increased the conforming loan limit in certain
high-cost areas for mortgages originated from July 1, 2007
through December 31, 2008. The new loan limits are
applicable to high cost areas only and are the higher of the
2008 conforming loan limit ($417,000) or 125% of the HUD
determined area median house price, not to exceed $729,750, for
a 1-unit
property. See EXECUTIVE SUMMARY Legislative
and Regulatory Matters Government Sponsored
Enterprise, or GSE, Oversight Legislation for changes
to the conforming loan limits effective January 1, 2009. We
have specified certain credit requirements for loans we will
accept in this category, including but not limited to,
(a) limitations in certain volatile home price markets,
(b) required borrower documentation of income and assets,
(c) limits on cash-out refinancing amounts and (d) a
maximum original LTV ratio of 90%. We began purchasing and
securitizing conforming-jumbo mortgages in April 2008. Our
purchases of these loans into our total mortgage portfolio for
the three months ended June 30, 2008 have totaled
$471 million in unpaid principal balance. We have
experienced increased competition in the mortgage finance market
during the first half of 2008 with respect to this product.
Given market conditions and competition especially from FHA, we
do not anticipate purchasing material amounts of conforming
jumbo product in 2008.
Table 37 provides characteristics of our single-family
mortgage loans purchased during the three and six months ended
June 30, 2008 and 2007, and of our single-family mortgage
portfolio at June 30, 2008 and December 31, 2007.
Table 37
Characteristics of Single-Family Mortgage
Portfolio(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases During
|
|
|
Purchases During
|
|
|
|
|
|
|
the Three Months
|
|
|
the Six Months
|
|
|
Portfolio at
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Original LTV Ratio
Range(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
£
60%
|
|
|
26
|
%
|
|
|
17
|
%
|
|
|
24
|
%
|
|
|
18
|
%
|
|
|
22
|
%
|
|
|
22
|
%
|
> 60% 70%
|
|
|
17
|
|
|
|
14
|
|
|
|
17
|
|
|
|
14
|
|
|
|
16
|
|
|
|
16
|
|
> 70% 80%
|
|
|
38
|
|
|
|
54
|
|
|
|
39
|
|
|
|
54
|
|
|
|
46
|
|
|
|
47
|
|
> 80% 90%
|
|
|
11
|
|
|
|
6
|
|
|
|
11
|
|
|
|
6
|
|
|
|
8
|
|
|
|
8
|
|
> 90% 100%
|
|
|
8
|
|
|
|
9
|
|
|
|
9
|
|
|
|
8
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average original LTV ratio
|
|
|
70
|
%
|
|
|
74
|
%
|
|
|
71
|
%
|
|
|
73
|
%
|
|
|
71
|
%
|
|
|
71
|
%
|
Estimated Current LTV Ratio
Range(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
£
60%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
%
|
|
|
41
|
%
|
> 60% 70%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
15
|
|
> 70% 80%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
19
|
|
> 80% 90%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
15
|
|
> 90% 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
7
|
|
> 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average estimated current LTV ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
|
%
|
|
|
63
|
%
|
Credit
Score(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
³740
|
|
|
54
|
%
|
|
|
42
|
%
|
|
|
52
|
%
|
|
|
42
|
%
|
|
|
45
|
%
|
|
|
45
|
%
|
700 739
|
|
|
22
|
|
|
|
23
|
|
|
|
22
|
|
|
|
23
|
|
|
|
23
|
|
|
|
23
|
|
660 699
|
|
|
15
|
|
|
|
19
|
|
|
|
16
|
|
|
|
19
|
|
|
|
18
|
|
|
|
18
|
|
620 659
|
|
|
6
|
|
|
|
10
|
|
|
|
7
|
|
|
|
10
|
|
|
|
9
|
|
|
|
9
|
|
< 620
|
|
|
3
|
|
|
|
5
|
|
|
|
3
|
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
Not available
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average credit score
|
|
|
735
|
|
|
|
719
|
|
|
|
732
|
|
|
|
719
|
|
|
|
724
|
|
|
|
723
|
|
Loan Purpose
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
34
|
%
|
|
|
47
|
%
|
|
|
35
|
%
|
|
|
46
|
%
|
|
|
39
|
%
|
|
|
40
|
%
|
Cash-out refinance
|
|
|
36
|
|
|
|
33
|
|
|
|
34
|
|
|
|
34
|
|
|
|
31
|
|
|
|
30
|
|
Other refinance
|
|
|
30
|
|
|
|
20
|
|
|
|
31
|
|
|
|
20
|
|
|
|
30
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 unit
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
2-4 units
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary residence
|
|
|
90
|
%
|
|
|
89
|
%
|
|
|
90
|
%
|
|
|
89
|
%
|
|
|
91
|
%
|
|
|
91
|
%
|
Second/vacation home
|
|
|
5
|
|
|
|
6
|
|
|
|
5
|
|
|
|
6
|
|
|
|
5
|
|
|
|
5
|
|
Investment
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Purchases and ending balances are
based on the unpaid principal balance of the single-family
mortgage portfolio excluding certain Structured Transactions.
Structured Transactions with ending balances of $3 billion
at June 30, 2008 and $6 billion at December 31,
2007 are excluded since these securities are backed by
non-Freddie Mac issued securities for which the loan
characteristics data was not available.
|
(2)
|
Original LTV ratios are calculated
as the amount of the mortgage we guarantee including the
credit-enhanced portion, divided by the lesser of the appraised
value of the property at time of mortgage origination or the
mortgage borrowers purchase price. Second liens not owned
or guaranteed by us are excluded from the LTV ratio calculation.
|
(3)
|
Current market values are estimated
by adjusting the value of the property at origination based on
changes in the market value of homes since origination.
Estimated current LTV ratio range is not applicable to purchases
made during 2008, includes the credit-enhanced portion of the
loan and excludes any secondary financing by third parties.
Including secondary financing, the total LTV ratios above 90%
were 14% at both June 30, 2008 and December 31, 2007.
|
(4)
|
Credit score data is as of mortgage
loan origination and is based on the rating system scale
developed by Fair, Isaac and Co., Inc., or
FICO®,
scores.
|
Our charter requires that single-family mortgages with LTV
ratios above 80% at the time of purchase be covered by one or
more of the following: (a) mortgage insurance for mortgage
amounts above the 80% threshold; (b) a sellers
agreement to repurchase or replace any mortgage upon default; or
(c) retention by the seller of at least a 10% participation
interest in the mortgages. In addition, we employ other types of
credit enhancements, including pool insurance, indemnification
agreements, collateral pledged by lenders and subordinated
security structures. For the approximately 29% and 25% of
single-family
mortgage loans with greater than 80% estimated current LTV
ratios, the borrowers had a weighted average credit score at
origination of 710 and 708 at June 30, 2008 and
December 31, 2007, respectively.
Higher
Risk Combinations
Combining certain loan characteristics often can indicate a
higher degree of credit risk. For example, mortgages with both
high LTV ratios and borrowers who have lower credit scores
typically experience higher rates of delinquency, default and
credit losses. However, our participation in these categories
generally helps us meet our affordable housing goals. For
approximately 13% of single-family mortgage loans, including
those underlying our PCs and Structured Securities, where the
average credit score of the borrower was less than 660, the
average estimated current LTV ratio based on our first lien
exposure, was 75% and 71% at June 30, 2008 and
December 31, 2007, respectively. As of June 30, 2008,
approximately 1% of single-family mortgage loans we have
guaranteed were made to borrowers with credit scores below 620
and had first lien, original LTV ratios, based on the loan
amount we guarantee, above 90% at the time of mortgage
origination. In addition, as of June 30, 2008, 4% of
Alt-A
single-family loans we have guaranteed were made to borrowers
with credit scores below 620 at mortgage origination. In prior
years, as home prices increased, many borrowers used second
liens at the time of purchase to reduce the LTV ratio on first
lien mortgages. Including this secondary financing by third
parties, we estimate that the percentage of first lien loans we
have guaranteed that have total original LTV ratios above 90%
was approximately 14% at both June 30, 2008 and
December 31, 2007.
Portfolio
Product Diversification
Product mix affects the credit risk profile of our total
mortgage portfolio. In general,
15-year
amortizing fixed-rate mortgages exhibit the lowest default rate
among the types of mortgage loans we securitize and purchase,
due to the accelerated rate of principal amortization on these
mortgages and the credit profiles of borrowers who seek and
qualify for them. In a rising interest rate environment,
balloon/reset mortgages and ARMs typically default at a higher
rate than fixed-rate mortgages, although default rates for
different types of ARMs may vary.
The primary mortgage products within our retained portfolio
mortgage loans and our issued PCs and Structured Securities
portfolio are conventional first lien, fixed-rate mortgage
loans. We did not purchase any second lien mortgage loans during
the six months ended June 30, 2008 and 2007 and these loans
constituted less than 0.1% of those underlying our PCs and
Structured Securities portfolio as of June 30, 2008.
However, during the past several years, there was a rapid
proliferation of mortgage products designed to address a variety
of borrower and lender needs, including issues of affordability,
and reduced income documentation requirements. While features of
these products have been on the market for some time, their
prevalence in the market and in our total mortgage portfolio has
increased. See ITEM 1. BUSINESS
REGULATION AND SUPERVISION Office of Federal
Housing Enterprise Oversight Guidance on
Non-traditional Mortgage Product Risks and Subprime
Lending and ITEM 1A. RISK
FACTORS Legal and Regulatory Risks in our
Registration Statement for more information on these products.
Single-family traditional long-term fixed-rate mortgages
comprised approximately 80% of our retained portfolio mortgage
loans and loans underlying our issued PCs and Structured
Securities at both June 30, 2008 and December 31, 2007.
Structured
Transactions
We also issue certain Structured Securities to third parties in
exchange for non-Freddie Mac mortgage-related securities. The
non-Freddie Mac mortgage-related securities use collateral
transferred to trusts that were specifically created for the
purpose of issuing the securities. We refer to this type of
Structured Security as a Structured Transaction. Structured
Transactions can generally be segregated into two different
types. In the most common type, we purchase only the senior
tranches from a non-Freddie Mac senior-subordinated
securitization, place these senior tranches into a
securitization trust, provide a guarantee of the principal and
interest of the senior tranches, and issue the Structured
Transaction. For other Structured Transactions, we purchase
single-class, or pass-through, securities, place them in a
securitization trust, guarantee the principal and interest, and
issue the Structured Transaction. In the first type of
Structured Transaction, the senior tranches we purchase as
collateral for the Structured Transactions benefit from credit
protections from the related subordinated tranches, which we do
not purchase. Additionally, there are other credit enhancements
and structural features retained by the seller, such as excess
interest or overcollateralization, which provide credit
protection to our interests, and reduce the likelihood that we
will have to perform under our guarantee. Structured
Transactions backed by single-class pass-through securities do
not benefit from structural or other credit enhancement
protections. In exchange for providing our guarantee on
Structured Transactions, we may receive a management and
guarantee fee.
Subprime
Loans
Participants in the mortgage market often characterize
single-family loans based upon their overall credit quality at
the time of origination, generally considering them to be prime
or subprime. There is no universally accepted definition of
subprime. The subprime segment of the mortgage market primarily
serves borrowers with poorer credit payment histories and such
loans typically have a mix of credit characteristics that
indicate a higher likelihood of default and higher loss
severities than prime loans. Such characteristics might include
a combination of high LTV ratios, low credit scores or
originations using lower underwriting standards such as limited
or no documentation of a borrowers income. The subprime
market helps certain borrowers by broadening the availability of
mortgage credit. While we have not historically characterized
the single-family loans underlying our PCs and Structured
Securities as either prime or subprime, we do monitor the amount
of loans we have guaranteed with characteristics that indicate a
higher degree of credit risk (see Higher Risk
Combinations for further information). In addition, we
estimate that approximately $6 billion of security
collateral underlying our Structured Transactions at both
June 30, 2008 and December 31, 2007 were classified as
subprime.
With respect to our retained portfolio, at June 30, 2008
and December 31, 2007, we held investments of approximately
$86 billion and $101 billion, respectively, of
non-agency mortgage-related securities backed by subprime loans.
These securities include significant credit enhancement,
particularly through subordination, and 91% and 100% of these
securities were investment grade at June 30, 2008 and
December 31, 2007, respectively. During 2008, the credit
characteristics of these securities have experienced significant
and rapid declines. See CONSOLIDATED BALANCE SHEET
ANALYSIS Retained Portfolio for further
discussion and our evaluation of these securities for impairment.
On July 8, 2008, the American Securitization Forum, or ASF,
working with various constituency groups as well as
representatives of U.S. federal government agencies,
updated the Streamlined Foreclosure and Loss Avoidance Framework
for Securitized Subprime ARM Loans, or the ASF Framework, which
the ASF originally issued in 2007. The ASF Framework provides
guidance for servicers to streamline borrower evaluation
procedures and to facilitate the use of foreclosure and loss
prevention efforts in an attempt to reduce the number of
U.S. subprime residential mortgage borrowers who might
default during 2008 because the borrowers cannot afford the
increased payments after the interest rate is reset, or
adjusted, on their mortgage loans. The ASF Framework is focused
on subprime, first-lien, ARMs that have an initial fixed
interest rate period of 36 months or less, are included in
securitized pools, were originated between January 1, 2005
and July 31, 2007, and have an initial interest rate reset
date between January 1, 2008 and July 31, 2010
(defined as Subprime ARM Loans within the ASF
Framework). Under the ASF Framework, Subprime ARM Loans are
divided into the following segments:
|
|
|
|
|
Segment 1 those where the borrowers are expected to
refinance their loans if they are unable or unwilling to meet
their reset payment obligations;
|
|
|
|
Segment 2 those where the borrower is unlikely to be
able to refinance into any readily available mortgage product.
Criteria to categorize these loans include a credit score less
than 660 and other criteria that would otherwise make the loan
FHA ineligible.
|
|
|
|
Segment 3 those where the borrower is unlikely to be
able to refinance into any readily available mortgage product
and the servicer is expected to pursue available loss mitigation
actions.
|
As of June 30, 2008, approximately $19 million of
mortgage loans that back our PCs and Structured Securities meet
the qualifications of segment 2, Subprime ARM Loan.
However, we have not applied the approach in the ASF Framework
and it has not had any impact on the off-balance sheet treatment
of our PCs and Structured Securities that hold loans meeting the
related Subprime ARM Loan criteria. Our loss mitigation approach
for Subprime ARM Loans under the ASF Framework is the same as
any other delinquent loan underlying our PCs and Structured
Securities. Refer to ITEM 2. FINANCIAL
INFORMATION ANNUAL MD&A CREDIT
RISKS Mortgage Credit Risk Loss
Mitigation Activities in our Registration Statement
for a description of our approach to loss mitigation activity.
Alt-A
Loans
Many mortgage market participants classify single-family loans
with credit characteristics that range between their prime and
subprime categories as
Alt-A
because these loans have a combination of characteristics of
each category or may be underwritten with lower or alternative
documentation than a full documentation mortgage loan. Although
there is no universally accepted definition of
Alt-A,
industry participants have used this classification principally
to describe loans for which the underwriting process has been
streamlined in order to reduce the documentation requirements of
the borrower or allow alternative documentation.
We principally acquire mortgage loans originated as
Alt-A from
our traditional lenders that largely specialize in originating
prime mortgage loans. These lenders typically originate
Alt-A loans
as a complementary product offering and generally follow an
origination path similar to that used for their prime
origination process. In determining our
Alt-A
exposure in loans underlying our single-family mortgage
portfolio, we have classified mortgage loans as
Alt-A if the
lender that delivers them to us has classified the loans as
Alt-A, or if
the loans had reduced documentation requirements, which indicate
that the loan should be classified as
Alt-A. We
estimate that approximately $188 billion, or 10%, of loans
underlying our guaranteed PCs and Structured Securities at
June 30, 2008 were classified as
Alt-A
mortgage loans. In addition, we estimate that approximately
$2 billion, or approximately 7%, of our investments in
single-family mortgage loans in our retained portfolio were
classified as
Alt-A loans
as of June 30, 2008. For all of these
Alt-A loans
combined, the average credit score was 724, the estimated
current average LTV ratio, based on our guaranteed exposure, was
78%. The
delinquency rate for these
Alt-A loans
was 3.72% and 1.86% at June 30, 2008 and December 31,
2007, respectively. We implemented several changes in our
underwriting and eligibility criteria in 2008 to reduce our
acquisition of certain higher-risk loan products, including
Alt-A loans.
As a result there are approximately $14 billion of
single-family
Alt-A
mortgage loans in our retained portfolio and underlying our PCs
and Structured Securities as of June 30, 2008 that were
originated in 2008 as compared to $60 billion remaining as
of June 30, 2008 that were originated in 2007.
We also invest in non-agency mortgage-related securities backed
by Alt-A
loans in our retained portfolio. We have classified these
securities as
Alt-A if the
securities were labeled as
Alt-A when
sold to us or if we believe the underlying collateral includes a
significant amount of
Alt-A loans.
A total of $48 billion and $51 billion of our
single-family non-agency mortgage-related securities were backed
by Alt-A and
other mortgage loans at June 30, 2008 and December 31,
2007, respectively. We have focused our purchases on
credit-enhanced, senior tranches of these securities, which
provide additional protection due to subordination. Of these
securities, 98% and 100% were investment grade at June 30,
2008 and December 31, 2007, respectively. We estimate that
the declines in fair values for most of these securities have
been due to decreased liquidity and larger risk premiums in the
mortgage market. See CONSOLIDATED BALANCE SHEET
ANALYSIS Retained Portfolio for discussion of
our evaluation of these securities for impairment.
Credit
Enhancements
At June 30, 2008 and December 31, 2007, our
credit-enhanced mortgages and mortgage-related securities
represented approximately 18% and 17% of the $1,914 billion
and $1,819 billion, respectively, of the unpaid principal
balance of the total mortgage portfolio, excluding non-Freddie
Mac mortgage-related securities, our Structured Transactions and
that portion of issued Structured Securities that is backed by
Ginnie Mae Certificates. We exclude non-Freddie Mac
mortgage-related securities because they expose us primarily to
institutional credit risk. We exclude that portion of Structured
Securities backed by Ginnie Mae Certificates because the
incremental credit risk to which we are exposed is considered
insignificant. Although many of our Structured Transactions are
credit enhanced, including through the use of subordinated
structures, we have excluded these balances because we do not
perform the servicing of the underlying securities. See
CONSOLIDATED BALANCE SHEETS ANALYSIS Retained
Portfolio for additional information on credit enhancement
coverage of our investments in non-Freddie Mac mortgage-related
securities.
Primary mortgage insurance is the most prevalent type of credit
enhancement protecting our single-family mortgage portfolio,
including those underlying our PCs and Structured Securities,
and is typically provided on a loan-level basis. As of
June 30, 2008 and December 31, 2007, in connection
with the single-family mortgage portfolio, excluding the loans
that are underlying Structured Transactions, the maximum amount
of losses we could recover under primary mortgage insurance,
excluding reimbursement of expenses was $58.5 billion and
$51.9 billion, respectively.
Other prevalent types of credit enhancement that we use are
lender recourse and indemnification agreements (under which we
may require a lender to reimburse us for credit losses realized
on mortgages), as well as pool insurance. Pool insurance
provides insurance on a pool of loans up to a stated aggregate
loss limit. In addition to a pool-level loss coverage limit,
some pool insurance contracts may have limits on coverage at the
loan level. At June 30, 2008 and December 31, 2007, in
connection with the single-family mortgage portfolio, excluding
the loans that are underlying Structured Transactions, the
maximum amount of losses we could recover under lender recourse
and indemnification agreements was $11.7 billion and
$12.1 billion, respectively; and at both dates, we had
$3.8 billion in pool insurance. See Institutional
Credit Risk Mortgage and Bond Insurers
and Mortgage Seller/Servicers for further
discussion about our mortgage loan insurers and seller/servicers.
Other forms of credit enhancements on single-family mortgage
loans include government guarantees, collateral (including cash
or high-quality marketable securities) pledged by a lender,
excess interest and subordinated security structures. At both
June 30, 2008 and December 31, 2007, in connection
with the single-family mortgage portfolio, excluding the loans
that are underlying Structured Transactions, the maximum amount
of losses we could recover under other forms of credit
enhancements was $0.5 billion. Table 38 provides
information on credit enhancements and credit performance for
our Structured Transactions.
Table 38
Credit Enhancement, or CE, and Credit Performance of
Single-Family Structured
Transactions(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal Balance
|
|
|
|
|
|
|
|
|
Credit
Losses(4)
|
|
|
|
at June 30,
|
|
|
Average CE
|
|
|
Delinquency
|
|
|
Six Months Ended June 30,
|
|
Structured Transaction Type
|
|
2008
|
|
|
2007
|
|
|
Coverage(2)
|
|
|
Rate(3)
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Pass-through
|
|
$
|
19,821
|
(5)
|
|
$
|
14,681
|
(5)
|
|
|
|
%
|
|
|
4.99
|
%
|
|
$
|
19
|
|
|
$
|
|
|
Overcollateralization
|
|
|
5,592
|
|
|
|
4,584
|
|
|
|
19
|
%
|
|
|
16.41
|
%
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Structured Transactions
|
|
$
|
25,413
|
|
|
$
|
19,265
|
|
|
|
4
|
%
|
|
|
11.86
|
%
|
|
$
|
20
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Structured Transactions are a type of Structured Security where
we issue our guarantee in a securitization using private-label,
or non-Freddie Mac issued securities, as collateral. We issue
two types of Structured Transactions, those using securities
with senior/subordinated structures as well as other forms of
credit enhancements, which represent the amount of protection
against financial loss, and those without such structures which
we categorize as a pass-through transaction. Credit enhancement
percentages for each category are calculated based on
information available from third-party financial data providers
and exclude certain loan-level credit enhancements, such as
private mortgage insurance, that may also afford additional
protection to us.
|
(2)
|
Average credit enhancement represents a weighted-average
coverage percentage, is based on unpaid principal balances and
includes overcollateralization and subordination at
June 30, 2008.
|
(3)
|
Based on the number of loans that are past due 90 days or
more, at June 30, 2008.
|
(4)
|
Represents the total of our guaranteed payments that has
exceeded the remittances of the underlying collateral and
includes amounts charged-off during the period. Charge-offs are
the amount of contractual principal balance that has been
discharged in order to satisfy the mortgage and extinguish our
guarantee.
|
(5)
|
Includes $2.0 billion and $2.4 billion at
June 30, 2008 and 2007, respectively, that are securitized
FHA/VA loans, for which those agencies provide recourse for 100%
of qualifying losses associated with the loan.
|
The delinquency rates associated with Structured Transactions
categorized as pass-through structures have increased
significantly during 2008. Although our credit losses to date
have been minimal, we have increased our provision for credit
losses on these guarantees during the three and six months ended
June 30, 2008. Our credit losses on Structured Transactions
during the six months ended June 30, 2008 are principally
related to Option ARM loans underlying several of these
transactions. Our loan loss reserves associated with
pass-through Structured Transactions issued prior to
January 1, 2008, as a coverage ratio of the related
outstanding UPB was approximately 2.0% and 1.3% as of
June 30, 2008 and December 31, 2007, respectively. We
are actively monitoring the credit performance of the loans
underlying these Structured Transactions, particularly those
originated during 2006 and 2007, and we will continue our loss
mitigation efforts in the remainder of 2008.
We may use credit enhancements to mitigate risk of loss on
certain multifamily mortgages and revenue bonds, generally those
without recourse to the borrower. At June 30, 2008 and
December 31, 2007, in connection with multifamily loans as
well as PCs and Structured Securities backed by multifamily
mortgage loans, excluding the loans that are underlying
Structured Transactions, we had maximum coverage of
$2.7 billion and $1.2 billion, respectively.
Loss
Mitigation Activities
Loss mitigation activities are a key component of our strategy
for managing and resolving troubled assets and lowering credit
losses. Our single-family loss mitigation strategy emphasizes
early intervention in delinquent mortgages and providing
alternatives to foreclosure. Other single-family loss mitigation
activities include providing our single-family servicers with
default management tools designed to help them manage
non-performing loans more effectively and support fulfillment of
our mission by assisting borrowers in retaining homeownership.
Foreclosure alternatives are intended to reduce the number of
delinquent mortgages that proceed to foreclosure and,
ultimately, mitigate our total credit losses by reducing or
eliminating a portion of the costs related to foreclosed
properties and avoiding the credit loss in REO. Our loss
mitigation activities have increased for the three and six
months ended June 30, 2008 compared to the three and six
months ended June 30, 2007, as shown in Table 39.
Table 39
Single-Family Foreclosure
Alternatives(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(number of loans)
|
|
|
Repayment plans
|
|
|
10,691
|
|
|
|
9,031
|
|
|
|
23,078
|
|
|
|
20,103
|
|
Loan modifications
|
|
|
4,687
|
|
|
|
2,179
|
|
|
|
8,933
|
|
|
|
4,081
|
|
Forbearance agreements
|
|
|
785
|
|
|
|
740
|
|
|
|
1,602
|
|
|
|
1,803
|
|
Pre-foreclosure sales
|
|
|
1,252
|
|
|
|
530
|
|
|
|
2,083
|
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosure alternatives
|
|
|
17,415
|
|
|
|
12,480
|
|
|
|
35,696
|
|
|
|
26,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on the single-family mortgage
portfolio, excluding non-Freddie Mac mortgage-related
securities, Structured Transactions and that portion of
Structured Securities that is backed by Ginnie Mae Certificates.
|
Repayment plans are generally agreements with the borrower
outside of the original mortgage loan agreement which allow for
the borrower to separately repay all past due amounts, including
nominal interest. Loan modifications include either:
(a) those that result in a concession to the borrower,
which are the only situations in which we do not expect to
recover the full original principal and interest due under the
loan, or (b) those that do not result in a concession to
the borrower, such as adding the past due amounts to the balance
of the loan and extending the term. The majority of our loan
modifications for the three and six months ended June 30,
2008 are those in which we have agreed to add the past due
amounts to the balance of the loan. Due to the higher rates of
delinquency in loans underlying our single-family PCs, we are
increasing our use of loan modifications and pre-foreclosure
sales in 2008 as compared to 2007.
Credit
Performance
Performing
and Non-Performing Assets
We have classified single-family loans in our total mortgage
portfolio that are past due for 90 days or more (seriously
delinquent) or whose contractual terms have been modified as a
troubled debt restructuring due to the financial difficulties of
the borrower as non-performing assets. Similarly, multifamily
loans are classified as non-performing assets if they are
90 days or more past due (seriously delinquent), if
collectibility of principal and interest is not reasonably
assured based on an individual loan level assessment, or if
their contractual terms have been modified due to financial
difficulties of the borrower. Table 40 provides detail of
performing and non-performing assets within our total mortgage
portfolio.
Table
40 Performing and Non-Performing
Assets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
Non-Performing Assets
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
90 Days
|
|
|
Seriously
|
|
|
|
|
|
|
Assets(2)
|
|
|
Past
Due(3)
|
|
|
Delinquent(4)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage loans in the retained portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
$
|
63,504
|
|
|
$
|
60
|
|
|
$
|
|
|
|
$
|
63,564
|
|
Multifamily troubled debt restructurings
|
|
|
|
|
|
|
243
|
|
|
|
21
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio, multifamily
|
|
|
63,504
|
|
|
|
303
|
|
|
|
21
|
|
|
|
63,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
17,105
|
|
|
|
|
|
|
|
876
|
|
|
|
17,981
|
|
Single-family loans purchased under financial
guarantees(5)
|
|
|
3,450
|
|
|
|
|
|
|
|
2,649
|
|
|
|
6,099
|
|
Single-family troubled debt restructurings
|
|
|
|
|
|
|
2,433
|
|
|
|
682
|
|
|
|
3,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio, single-family
|
|
|
20,555
|
|
|
|
2,433
|
|
|
|
4,207
|
|
|
|
27,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio
|
|
|
84,059
|
|
|
|
2,736
|
|
|
|
4,228
|
|
|
|
91,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily(6)
|
|
|
13,864
|
|
|
|
51
|
|
|
|
12
|
|
|
|
13,927
|
|
Single-family(6)
|
|
|
1,766,179
|
|
|
|
|
|
|
|
16,283
|
|
|
|
1,782,462
|
|
Structured Securities backed by non-Freddie Mac mortgage-related
securities(7)
|
|
|
25,437
|
|
|
|
|
|
|
|
1,977
|
|
|
|
27,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, guaranteed PCs and Structured Securities
|
|
|
1,805,480
|
|
|
|
51
|
|
|
|
18,272
|
|
|
|
1,823,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REO, net
|
|
|
|
|
|
|
|
|
|
|
2,580
|
|
|
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,889,539
|
|
|
$
|
2,787
|
|
|
$
|
25,080
|
|
|
$
|
1,917,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Non-Performing Assets
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
90 Days
|
|
|
Seriously
|
|
|
|
|
|
|
Assets(2)
|
|
|
Past
Due(3)
|
|
|
Delinquent(4)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage loans in the retained portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
$
|
57,295
|
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
57,298
|
|
Multifamily troubled debt restructurings
|
|
|
|
|
|
|
264
|
|
|
|
7
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio, multifamily
|
|
|
57,295
|
|
|
|
264
|
|
|
|
10
|
|
|
|
57,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
13,591
|
|
|
|
|
|
|
|
698
|
|
|
|
14,289
|
|
Single-family loans purchased under financial
guarantees(5)
|
|
|
2,399
|
|
|
|
|
|
|
|
4,602
|
|
|
|
7,001
|
|
Single-family troubled debt restructurings
|
|
|
|
|
|
|
2,690
|
|
|
|
609
|
|
|
|
3,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio, single-family
|
|
|
15,990
|
|
|
|
2,690
|
|
|
|
5,909
|
|
|
|
24,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio
|
|
|
73,285
|
|
|
|
2,954
|
|
|
|
5,919
|
|
|
|
82,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily(6)
|
|
|
10,607
|
|
|
|
51
|
|
|
|
|
|
|
|
10,658
|
|
Single-family(6)
|
|
|
1,700,543
|
|
|
|
|
|
|
|
6,141
|
|
|
|
1,706,684
|
|
Structured Securities backed by non-Freddie Mac mortgage-related
securities(7)
|
|
|
19,846
|
|
|
|
|
|
|
|
1,645
|
|
|
|
21,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, guaranteed PCs and Structured Securities
|
|
|
1,730,996
|
|
|
|
51
|
|
|
|
7,786
|
|
|
|
1,738,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REO, net
|
|
|
|
|
|
|
|
|
|
|
1,736
|
|
|
|
1,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,804,281
|
|
|
$
|
3,005
|
|
|
$
|
15,441
|
|
|
$
|
1,822,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Balances exclude mortgage loans and
mortgage-related securities traded, but not yet settled. For PCs
and Structured Securities, the balance reflects reported
security balances and not unpaid principal of the underlying
mortgage loans. Mortgage loans held in our retained portfolio
reflect the unpaid principal balances of the loan.
|
(2)
|
Consists of single-family and
multifamily loans that are less than 90 days past due and
not classified as a troubled debt restructuring.
|
(3)
|
Includes single-family loans that
were previously reported as seriously delinquent and for which
the original loan terms have been modified.
|
(4)
|
Consists of loans 90 days or
more delinquent or in foreclosure at period end. Delinquency
status does not apply to REO; however, REO is included in
non-performing assets.
|
(5)
|
Represent those loans purchased
from the mortgage pools underlying our PCs, Structured
Securities or long-term standby agreements due to the
borrowers delinquency. Once we purchase a loan under our
financial guarantee, it is placed on non-accrual status as long
as it remains greater than 90 days past due.
|
(6)
|
Excludes our Structured Securities
that we classify separately as Structured Transactions.
|
(7)
|
Consist of our single-family and
multifamily Structured Transactions and that portion of
Structured Securities that is backed by Ginnie Mae Certificates.
|
The amount of non-performing assets increased 51% during the six
months ended June 30, 2008, to approximately
$27.9 billion, from $18.4 billion at December 31,
2007, due to continued deterioration in single-family housing
market fundamentals, as well as increases in the average size of
seriously delinquent loans compared to 2007. The delinquency
transition rate is the percentage of delinquent loans that
proceed to foreclosure or are modified as troubled debt
restructurings. This rate increased during the six months ended
June 30, 2008, compared to the same period of 2007. The
changes in these delinquency transition rates, as compared to
our historical experience, have been progressively worse for
loans originated in 2006 and 2007. We believe this trend is, in
part, due to our greater purchase volume of non-traditional
loans, such as interest-only mortgages during those years. In
addition, the balance of our REO, net, increased 49% during the
six months ended June 30, 2008. Until nationwide home
prices return to historical appreciation rates and selected
regional economies improve, we expect to continue to experience
higher delinquency transition rates than those experienced in
past years and further increases in our non-performing assets.
Delinquencies
We report single-family delinquency rate information based on
the number of loans that are 90 days or more past due. For
multifamily loans, we report the mortgage loans as delinquent
when payment is 90 days or more past due. Mortgage loans
whose contractual terms have been modified under agreement with
the borrower are not counted as delinquent for purposes of
reporting seriously delinquent loans if the borrower is less
than 90 days delinquent under the modified terms. We
include all the single-family loans that we own and those that
are collateral for our PCs and Structured Securities for which
we actively manage the credit risk. Consequently, we exclude
that portion of our Structured Securities that are backed by
Ginnie Mae Certificates and our Structured Transactions. We
exclude Structured Securities backed by Ginnie Mae Certificates
because these securities do not expose us to meaningful amounts
of credit risk due to the guarantee provided on these securities
by the U.S. government. We exclude Structured Transactions
from the delinquency rates of our single-family mortgage
portfolio because these are backed by non-Freddie Mac securities
and consequently, we do not service the underlying loans and do
not perform principal loss mitigation. Many of these securities
are significantly credit enhanced through subordination and are
not representative of the loans for which we have primary, or
first loss, exposure. Structured Transactions represented
approximately 1% of our total mortgage portfolio at both
June 30, 2008 and December 31, 2007. See
NOTE 5: MORTGAGE LOANS AND LOAN LOSS RESERVES
Table 5.6 Delinquency
Performance to our consolidated financial statements for
the delinquency performance of our single-family and multifamily
mortgage portfolios, including Structured Transactions.
Table 41 presents regional single-family delinquency rates
for non-credit enhanced loans.
Table
41 Single-Family Delinquency Rates,
Excluding Structured Transactions By
Region(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
Delinquency
|
|
|
Unpaid Principal
|
|
|
Delinquency
|
|
|
|
Balance(2)
|
|
|
Rate
|
|
|
Balance(2)
|
|
|
Rate
|
|
|
Northeast(1)
|
|
|
24
|
%
|
|
|
0.53
|
%
|
|
|
24
|
%
|
|
|
0.39
|
%
|
Southeast(1)
|
|
|
18
|
|
|
|
0.98
|
|
|
|
18
|
|
|
|
0.59
|
|
North
Central(1)
|
|
|
19
|
|
|
|
0.59
|
|
|
|
20
|
|
|
|
0.48
|
|
Southwest(1)
|
|
|
13
|
|
|
|
0.38
|
|
|
|
13
|
|
|
|
0.32
|
|
West(1)
|
|
|
26
|
|
|
|
0.80
|
|
|
|
25
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-credit-enhanced all regions
|
|
|
|
|
|
|
0.67
|
|
|
|
|
|
|
|
0.45
|
|
Total credit-enhanced all regions
|
|
|
|
|
|
|
2.10
|
|
|
|
|
|
|
|
1.62
|
|
Total single-family portfolio
|
|
|
|
|
|
|
0.93
|
|
|
|
|
|
|
|
0.65
|
|
|
|
(1)
|
Presentation of non-credit-enhanced
delinquency rates with the following regional designation: West
(AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE,
DC, MA, ME, MD, NH, NJ, NY, PA, RI, VT, VA, WV); North Central
(IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY,
MS, NC, PR, SC, TN, VI); and Southwest (AR, CO, KS, LA, MO, NE,
NM, OK, TX, WY).
|
(2)
|
Based on mortgage loans in our
retained portfolio and total guaranteed PCs and Structured
Securities issued, excluding that portion of Structured
Securities that is backed by Ginnie Mae Certificates.
|
During 2007 and continuing in the six months ended June 30,
2008, home prices have declined broadly across the U.S. In some
geographical areas, particularly in the North Central region,
this decline has been combined with increased rates of
unemployment and weakness in home sales, which has resulted in
increases in delinquency rates throughout 2007 and the first
half of 2008. We have also experienced increases in delinquency
rates in the Northeast, Southeast and West regions for the six
months ended June 30, 2008, particularly in the states of
California, Florida, Nevada and Arizona.
Increases in delinquency rates occurred in all product types
during the six months ended June 30, 2008, but were most
significant for interest-only,
Alt-A and
ARM mortgage loans. Delinquency rates for interest-only and
option ARM products, which together represented approximately
10% of our total single-family mortgage guarantee portfolio at
June 30, 2008, increased to 4.10% and 4.92% at
June 30, 2008, respectively, compared with 2.03% and 2.24%
at December 31, 2007, respectively. Although we believe our
delinquency rates for the total single-family portfolio have
remained low relative to conforming loan delinquency rates of
other industry participants, we expect our delinquency rates to
continue to rise over the remainder of 2008.
Table 42 presents activities related to loans purchased
under financial guarantees for the three and six months ended
June 30, 2008 and 2007.
Table
42 Changes in Loans Purchased Under Financial
Guarantees(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
6,143
|
|
|
$
|
(1,444
|
)
|
|
$
|
(5
|
)
|
|
$
|
4,694
|
|
|
$
|
3,964
|
|
|
$
|
(411
|
)
|
|
$
|
(1
|
)
|
|
$
|
3,552
|
|
Purchases of loans
|
|
|
723
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
550
|
|
|
|
1,822
|
|
|
|
(340
|
)
|
|
|
|
|
|
|
1,482
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Principal repayments
|
|
|
(226
|
)
|
|
|
64
|
|
|
|
|
|
|
|
(162
|
)
|
|
|
(394
|
)
|
|
|
44
|
|
|
|
|
|
|
|
(350
|
)
|
Troubled debt
restructurings(2)
|
|
|
(17
|
)
|
|
|
5
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(178
|
)
|
|
|
24
|
|
|
|
|
|
|
|
(154
|
)
|
Foreclosures, transferred to REO
|
|
|
(524
|
)
|
|
|
162
|
|
|
|
1
|
|
|
|
(361
|
)
|
|
|
(498
|
)
|
|
|
62
|
|
|
|
|
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,099
|
|
|
$
|
(1,386
|
)
|
|
$
|
(6
|
)
|
|
$
|
4,707
|
|
|
$
|
4,716
|
|
|
$
|
(621
|
)
|
|
$
|
(2
|
)
|
|
$
|
4,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
7,001
|
|
|
$
|
(1,767
|
)
|
|
$
|
(2
|
)
|
|
$
|
5,232
|
|
|
$
|
2,983
|
|
|
$
|
(220
|
)
|
|
$
|
|
|
|
$
|
2,763
|
|
Purchases of loans
|
|
|
1,146
|
|
|
|
(245
|
)
|
|
|
|
|
|
|
901
|
|
|
|
3,648
|
|
|
|
(598
|
)
|
|
|
|
|
|
|
3,050
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Principal repayments
|
|
|
(510
|
)
|
|
|
139
|
|
|
|
|
|
|
|
(371
|
)
|
|
|
(706
|
)
|
|
|
67
|
|
|
|
|
|
|
|
(639
|
)
|
Troubled debt
restructurings(2)
|
|
|
(28
|
)
|
|
|
7
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(325
|
)
|
|
|
38
|
|
|
|
|
|
|
|
(287
|
)
|
Foreclosures, transferred to REO
|
|
|
(1,510
|
)
|
|
|
480
|
|
|
|
1
|
|
|
|
(1,029
|
)
|
|
|
(884
|
)
|
|
|
92
|
|
|
|
|
|
|
|
(792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,099
|
|
|
$
|
(1,386
|
)
|
|
$
|
(6
|
)
|
|
$
|
4,707
|
|
|
$
|
4,716
|
|
|
$
|
(621
|
)
|
|
$
|
(2
|
)
|
|
$
|
4,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consist of seriously delinquent
loans purchased in performance of our financial guarantees and
in accordance with Statement of Position No. 03-3,
Accounting for Certain Loans or Debt Securities
Acquired in a Transfer, or
SOP 03-3.
|
(2)
|
Consist of loans that have
transitioned into troubled debt restructurings during the stated
period. This excludes modifications involving capitalization, or
addition, of past due amounts to the balance of the loan to
return to current status during 2008.
|
As securities administrator, we are required to purchase a
mortgage loan from a mortgage pool if a court of competent
jurisdiction or a federal government agency, duly authorized to
oversee or regulate our mortgage purchase business,
determines that our purchase of the mortgage was unauthorized
and a cure is not practicable without unreasonable effort or
expense, or if such a court or government agency requires us to
repurchase the mortgage. Additionally, we are required to
purchase all convertible ARMs when the borrower exercises the
option to convert the interest rate from an adjustable rate to a
fixed rate; and in the case of balloon loans, shortly before the
mortgage reaches its scheduled balloon repayment date. For the
six months ended June 30, 2008 and 2007, we repurchased
$1,296 million and $132 million, respectively, of such
convertible ARMs and balloon loans, which increased in 2008 due
to higher volumes of convertible ARM loans securitized in the
last three years.
We also have the right to purchase mortgages that back our PCs
and Structured Securities from the underlying loan pools when
they are significantly past due. This right to repurchase
collateral is known as our repurchase option. Through November
2007, our general practice was to purchase the mortgage loans
out of PCs after the loans became 120 days delinquent.
Effective December 2007, we no longer automatically purchase
loans from PC pools once they become 120 days delinquent,
but rather, we purchase loans from PCs when the loans have been
120 days delinquent and (a) the loans are modified,
(b) foreclosure sales occur, (c) the loans have been
delinquent for 24 months or (d) the cost of guarantee
payments to PC holders, including advances of interest at the PC
coupon, exceeds the expected cost of holding the nonperforming
mortgage in our retained portfolio. Consequently, we purchased
fewer impaired loans under our repurchase option for the three
and six months ended June 30, 2008 as compared to the three
and six months ended June 30, 2007. We record at fair value
loans that we purchase in connection with our performance under
our financial guarantees and record losses on loans purchased on
our consolidated statements of income in order to reduce our net
investment in acquired loans to their fair value.
The unpaid principal balance of non-performing loans that have
been purchased under our financial guarantees and that have not
been modified under troubled debt restructurings decreased
approximately 13% and increased approximately 58% for the six
months ended June 30, 2008 and 2007, respectively. For the
six months ended June 30, 2008, we purchased approximately
$1.1 billion in unpaid principal balances of these loans
with a fair value at acquisition of $0.9 billion. Although
the volume of these repurchases has decreased in the six months
ended June 30, 2008, there was $12.5 billion unpaid
principal balance of loans remaining in our PCs and Structured
Securities as of June 30, 2008 that were greater than
120 days past due for which we have not exercised our
repurchase option.
The loans acquired under our financial guarantees for the six
months ended June 30, 2008 added $245 million of
purchase discount, which consists of $74 million that was
previously recorded on our consolidated balance sheets as loan
loss reserve or guarantee obligation and $171 million of
losses on loans purchased as shown on our consolidated
statements of income for the six months ended June 30,
2008. We expect that we will continue to incur losses on the
purchase of non-performing loans in 2008. However, the volume
and severity of these losses is dependent on many factors,
including the effects of our change in practice for repurchases
and regional changes in home prices and the volume of home sales.
Recoveries on loans impaired upon purchase represent the
recapture into income of previously recognized losses on loans
purchased and provision for credit losses associated with
purchases of delinquent loans from our PCs and Structured
Securities in conjunction with our guarantee activities.
Recoveries occur when a non-performing loan is repaid in full or
when at the time of foreclosure the estimated fair value of the
acquired property, less costs to sell, exceeds the carrying
value of the loan. During the six months ended June 30,
2008 and 2007, we recognized recoveries on loans impaired upon
purchase of $347 million and $107 million,
respectively. For impaired loans where the borrower has made
required payments that return to current status, the basis
adjustments are accreted into interest income over time as
periodic payments are received.
As of June 30, 2008, the cure rate for non-performing loans
that we purchased out of PCs during 2007 and 2006 was
approximately 41% and 57%, respectively. The cure rate is the
percentage of non-performing loans purchased with or without
modification from PCs under our financial guarantee that have
returned to current status or have been paid off, divided by the
total non-performing loans purchased from PCs under our
financial guarantee. A modified mortgage loan is classified as
performing to the extent it is 90 days or less past due. We
believe, based on our historical experience with 2006 and 2007
purchases, as well as our access to credit enhancement remedies,
that we will continue to recognize recoveries in 2008 on
impaired loans purchased during 2007 and 2006.
Table
43 Status of Delinquent Single-Family Loans
Purchased Under Financial
Guarantees(1)
|
|
|
|
|
|
|
|
|
|
|
Status as of
|
|
|
|
June 30,
2008(2)
|
|
|
|
2007
|
|
|
2006
|
|
|
Cured, with
modifications(3)
|
|
|
8
|
%
|
|
|
9
|
%
|
Cured, without modifications:
|
|
|
|
|
|
|
|
|
Returned to less than 90 days past due
|
|
|
19
|
|
|
|
22
|
|
Loans repaid in full or repurchased by lenders
|
|
|
14
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Total cured
|
|
|
41
|
|
|
|
57
|
|
Foreclosure(4)
|
|
|
36
|
|
|
|
33
|
|
Seriously delinquent
|
|
|
23
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on number of single-family
delinquent loans purchased under our financial performance
guarantees.
|
(2)
|
Represents the status as of
June 30, 2008 of the loans acquired under our financial
guarantee during each annual period.
|
(3)
|
Consists of loans that are less
than 90 days past due under modified terms, including those
resulting in a concession to the borrower. Loans that are
modified include: (a) those that result in a concession to
the borrower, which is the only situation in which we agree to
accept less than the full original principal and interest due
under the loan and (b) those that do not result in a
concession to the borrower, such as adding the past due amounts
to the balance of the loan. Modifications exclude borrower
repayment plans for past due amounts executed outside of the
original mortgage loan agreement.
|
(4)
|
Includes other dispositions that
result in acceptance of less than the full amount owed by the
borrower.
|
We have experienced increases in the rate at which loans
transition from delinquency to foreclosure as evidenced by the
increase of the foreclosure rate of our 2007 delinquent loan
purchases and the increase in our REO balance during the second
quarter of 2008. Our cure rates for 2007 delinquent loan
purchases as of June 30, 2008 reflect a higher rate of
these loans remaining delinquent when compared to the status of
2006 impaired loan purchases. We believe that these cure rate
statistics reflect both the lag effect inherent in delinquent
loans as well as the poorer performance of loans that were
originated during 2007. Throughout 2007 and continuing into
2008, consistent with most mortgage investors and servicers, we
have expanded our use of loan modifications and other
foreclosure alternatives to avoid borrower foreclosures and
reduce defaults. Consequently, we believe that the loans
categorized as Seriously delinquent in Table 43
above will continue to decline since these loans do not fully
reflect our current modification efforts because of the
significant lag between the time a loan is purchased from our
PCs and the conclusion of the loan resolution process. Although
we have increased our mitigation activity, including
modifications where we agree to add delinquent amounts to the
balance of the loan to bring the borrower current, these recent
efforts only partially offset the increases in the 2008 volume
of delinquent loans.
As discussed above, beginning in December 2007, we significantly
decreased our purchases of delinquent loans from our PCs.
Although this action decreased the number of loans we purchase
it had no effect on our loss mitigation efforts nor our ultimate
credit losses and cure rates. However, we believe this will have
significant impacts to our cure rate statistics for the loans we
purchase under financial guarantees in 2008, because loans that
in prior years would have been purchased from the pools after a
serious delinquency will now generally remain in the pools until
the loans have been modified. During 2008, other loans for which
foreclosure sales occur or that have been delinquent for
24 months are purchased from the pools at dates generally
later than before. Accordingly, while the number of loans we
purchase will decrease in the near term, we anticipate the
percentage Cured, with modifications and
Foreclosure of loans purchased under financial
guarantees in 2008 will increase, with a corresponding decrease
in the percentage of Cured, without modifications
and Seriously delinquent.
Table 44 provides detail by region for REO activity. Our
REO activity consists almost entirely of single-family
residential properties. Consequently, our regional REO
acquisition trends generally follow a pattern that is similar
to, but lags, that of regional delinquency trends of the
single-family mortgages underlying our PCs and Structured
Securities.
Table 44
REO Activity by
Region(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(number of units)
|
|
|
REO Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning property inventory
|
|
|
18,419
|
|
|
|
9,650
|
|
|
|
14,394
|
|
|
|
8,785
|
|
Properties acquired by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
|
1,310
|
|
|
|
492
|
|
|
|
2,577
|
|
|
|
888
|
|
Southeast
|
|
|
2,614
|
|
|
|
1,123
|
|
|
|
4,597
|
|
|
|
2,110
|
|
North Central
|
|
|
3,445
|
|
|
|
2,137
|
|
|
|
6,582
|
|
|
|
4,215
|
|
Southwest
|
|
|
1,465
|
|
|
|
940
|
|
|
|
2,835
|
|
|
|
1,897
|
|
West
|
|
|
3,576
|
|
|
|
321
|
|
|
|
5,758
|
|
|
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total properties acquired
|
|
|
12,410
|
|
|
|
5,013
|
|
|
|
22,349
|
|
|
|
9,651
|
|
Properties disposed by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
|
(1,000
|
)
|
|
|
(366
|
)
|
|
|
(1,622
|
)
|
|
|
(682
|
)
|
Southeast
|
|
|
(1,949
|
)
|
|
|
(1,059
|
)
|
|
|
(3,359
|
)
|
|
|
(1,903
|
)
|
North Central
|
|
|
(2,795
|
)
|
|
|
(1,943
|
)
|
|
|
(4,940
|
)
|
|
|
(3,616
|
)
|
Southwest
|
|
|
(1,359
|
)
|
|
|
(906
|
)
|
|
|
(2,414
|
)
|
|
|
(1,771
|
)
|
West
|
|
|
(1,697
|
)
|
|
|
(129
|
)
|
|
|
(2,379
|
)
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total properties disposed
|
|
|
(8,800
|
)
|
|
|
(4,403
|
)
|
|
|
(14,714
|
)
|
|
|
(8,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending property inventory
|
|
|
22,029
|
|
|
|
10,260
|
|
|
|
22,029
|
|
|
|
10,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Table 41
Single-Family Delinquency Rates, Excluding
Structured Transactions By Region for a
description of these regions.
|
Our REO property inventories increased 53% during the six months
ended June 30, 2008 reflecting the impact of the weakening
single-family housing market, particularly in the North Central,
West, Northeast and Southeast regions. The impact of a national
decline in single-family home prices and a decrease in the
volume of home sales activity during 2008 lessens the
alternatives to foreclosure for homeowners exposed to temporary
deterioration in their financial condition. Increases in our
single-family REO acquisitions have been most significant in the
states of California, Arizona, Michigan, Virginia, Florida and
Nevada, which had higher average loan balances due to home price
appreciation of the last several years. Although the West region
represents approximately 26% of the new acquisitions during the
six months ended June 30, 2008, based on the number of
units, the highest concentration in that region is in the state
of California. At June 30, 2008, our REO inventory in
California was approximately 25% of our total REO inventory.
California has accounted for an increasing amount of our credit
losses and approximately 30% of our total credit losses in the
three months ended June 30, 2008.
Although the composition of interest-only and
Alt-A loans
in our single-family mortgage portfolio was approximately 9% at
December 31, 2007, the number of our REO acquisitions that
had been secured by either of these loan types represented more
than 40% of our total REO acquisitions, based on unpaid
principal balance at foreclosure, during the six months ended
June 30, 2008. Interest-only and
Alt-A
mortgage loans also contributed to more than 50% of our credit
losses in the six months ended June 30, 2008.
Credit
Loss Performance
Some loans that are delinquent or in foreclosure result in
credit losses. Table 45 provides detail on our credit loss
performance associated with mortgage loans in our retained
portfolio, including those purchased out of our PCs and
Structured Securities.
Table 45
Credit Loss Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars in millions)
|
|
|
REO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REO balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
2,580
|
|
|
$
|
1,014
|
|
|
$
|
2,580
|
|
|
$
|
1,014
|
|
Multifamily
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,580
|
|
|
$
|
1,020
|
|
|
$
|
2,580
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REO operations expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
(265
|
)
|
|
$
|
(16
|
)
|
|
$
|
(473
|
)
|
|
$
|
(30
|
)
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(265
|
)
|
|
$
|
(16
|
)
|
|
$
|
(473
|
)
|
|
$
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHARGE-OFFS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs,
gross(1)
(including $628 million, $87 million,
$926 million and $166 million relating to loan loss
reserves, respectively)
|
|
$
|
(722
|
)
|
|
$
|
(114
|
)
|
|
$
|
(1,177
|
)
|
|
$
|
(207
|
)
|
Recoveries(2)
|
|
|
177
|
|
|
|
51
|
|
|
|
312
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family, net
|
|
|
(545
|
)
|
|
|
(63
|
)
|
|
|
(865
|
)
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs,
gross(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs,
gross(1)
(including $628 million, $87 million,
$926 million and $166 million relating to loan loss
reserves, respectively)
|
|
|
(722
|
)
|
|
|
(114
|
)
|
|
|
(1,177
|
)
|
|
|
(207
|
)
|
Recoveries(2)
|
|
|
177
|
|
|
|
51
|
|
|
|
312
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs, net
|
|
$
|
(545
|
)
|
|
$
|
(63
|
)
|
|
$
|
(865
|
)
|
|
$
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CREDIT
LOSSES(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
(810
|
)
|
|
$
|
(79
|
)
|
|
$
|
(1,338
|
)
|
|
$
|
(137
|
)
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(810
|
)
|
|
$
|
(79
|
)
|
|
$
|
(1,338
|
)
|
|
$
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total in basis
points(4)
(annualized)
|
|
|
17.3
|
|
|
|
2.0
|
|
|
|
14.5
|
|
|
|
1.7
|
|
|
|
(1)
|
Represent the amount of the unpaid
principal balance of a loan that has been discharged in order to
remove the loan from our retained portfolio at the time of
resolution, regardless of when the impact of the credit loss was
recorded on our consolidated statements of income through the
provision for credit losses or losses on loans purchased. The
amount of charge-offs for credit loss performance is generally
derived as the contractual balance of a loan at the date it is
discharged less the estimated value in final disposition.
|
(2)
|
Recoveries of charge-offs primarily
result from foreclosure alternatives and REO acquisitions on
loans where a share of default risk has been assumed by mortgage
insurers, servicers or other third parties through credit
enhancements.
|
(3)
|
Equal to REO operations expense
plus charge-offs, net.
|
(4)
|
Calculated as annualized credit
losses divided by the average total mortgage portfolio,
excluding non-Freddie Mac mortgage-related securities and that
portion of Structured Securities that is backed by Ginnie Mae
Certificates.
|
Our credit loss performance is a historic metric that measures
losses at the conclusion of the loan resolution process. Our
credit loss performance does not include our provision for
credit losses and losses on loans purchased. We expect our
credit losses to continue to increase during 2008, as market
conditions, such as home prices and the rate of home sales,
continue to deteriorate. As part of our disclosure commitments
with OFHEO, we disclose our estimate of credit loss sensitivity
on a quarterly basis, disclosing the present value of the change
in expected future credit losses from our issued single-family
guaranteed PCs and Structured Securities resulting from an
immediate 5% decline in home prices for the entire United
States. Our estimate of this measure of sensitivity, after
considering recoveries of credit enhancements such as mortgage
insurance and our assumptions about home price appreciation
after the initial 5% decline, was $4.2 billion and
$3.1 billion as of June 30, 2008 and December 31,
2007, respectively. The increase during 2008 was attributable to
the continued decline in home prices that has occurred during
the first six months of 2008.
Single-family charge-offs, gross, for the six months ended
June 30, 2008 increased to $1.2 billion compared to
$207 million for the six months ended June 30, 2007,
primarily due to an increase in the volume of REO properties
acquired at foreclosure and continued deterioration of
residential real estate markets in regional areas. The volume of
single-family REO additions increased 132% for the six months
ended June 30, 2008 as compared to the six months ended
June 30, 2007. The severity of charge-offs during the six
months ended June 30, 2008 has increased due to declines in
regional housing markets resulting in higher per-property
losses. Our per-property loss severity during 2008 has been
greatest in those areas
that experienced the fastest increases in property values during
2000 through 2006, such as California, Florida, Virginia, Nevada
and Arizona. In addition, although interest-only and
Alt-A loans
comprise approximately 9% and 10% of those underlying our PCs
and Structured Securities as of June 30, 2008,
respectively, these loans have contributed approximately 50% of
our credit losses during the six months ended June 30,
2008. The majority of interest-only and
Alt-A loans
in our single-family mortgage portfolio were originated in 2006
and 2007.
Loan
Loss Reserves
We maintain two loan loss reserves allowance for
losses on mortgage loans held-for-investment and reserve for
guarantee losses at levels we deem adequate to
absorb probable incurred losses on mortgage loans
held-for-investment in our retained portfolio and mortgages
underlying our PCs, Structured Securities and other financial
guarantees. Determining the loan loss and credit related loss
reserves associated with our mortgage loans and PCs and
Structured Securities is complex and requires significant
management judgment about matters that involve a high degree of
subjectivity. This management estimate is inherently more
difficult to perform due to the absence of historical precedents
relative to the current economic environment. See
MD&A CRITICAL ACCOUNTING POLICIES AND
ESTIMATES Allowance for Loan Losses and Reserve for
Guarantee Losses and ITEM 13. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING
NOTES NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES in our Registration Statement for further
information. Table 46 summarizes our loan loss reserves
activity for guaranteed loans and those mortgage loans held in
our retained portfolio, in total.
Table 46
Loan Loss Reserves Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Total loan loss
reserves:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,872
|
|
|
$
|
803
|
|
|
$
|
2,822
|
|
|
$
|
619
|
|
Provision for credit losses
|
|
|
2,537
|
|
|
|
447
|
|
|
|
3,777
|
|
|
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs,
gross(2)
|
|
|
(628
|
)
|
|
|
(87
|
)
|
|
|
(926
|
)
|
|
|
(166
|
)
|
Recoveries(3)
|
|
|
177
|
|
|
|
51
|
|
|
|
312
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs, net
|
|
|
(451
|
)
|
|
|
(36
|
)
|
|
|
(614
|
)
|
|
|
(66
|
)
|
Transfers,
net(4)
|
|
|
(145
|
)
|
|
|
(76
|
)
|
|
|
(172
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
5,813
|
|
|
$
|
1,138
|
|
|
$
|
5,813
|
|
|
$
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Include reserves for loans held for
investment in our retained portfolio and reserves for guarantee
losses on PCs and Structured Securities.
|
(2)
|
Charge-offs related to retained
mortgages represent the amount of the unpaid principal balance
of a loan that has been discharged using the reserve balance to
remove the loan from our retained portfolio at the time of
resolution. Charge-offs exclude $94 million and
$27 million for the three months ended June 30, 2008
and 2007, respectively, and $251 million and
$41 million for the six months ended June 30, 2008 and
2007, respectively, related to reserve amounts previously
transferred to reduce the carrying value of loans purchased
under financial guarantees.
|
(3)
|
Recoveries of charge-offs primarily
resulting from foreclosure alternatives and REO acquisitions on
loans where a share of default risk has been assumed by mortgage
insurers, servicers or other third parties through credit
enhancements.
|
(4)
|
Consist primarily of: (a) the
transfer of a proportional amount of the recognized reserves for
guaranteed losses related to PC pools associated with
non-performing loans purchased from mortgage pools underlying
our PCs, Structured Securities and long-term standby agreements
to establish the initial recorded investment in these loans at
the date of our purchase; and (b) amounts attributable to
uncollectible interest on PCs and Structured Securities in our
retained portfolio.
|
Our total loan loss reserves increased as we recorded additional
reserves to reflect increased estimates of incurred losses, an
observed increase in delinquency rates and increases in the
estimated severity of losses on a per-property basis related to
our single-family portfolio. See CONSOLIDATED RESULTS OF
OPERATIONS Non-Interest Expense
Provision for Credit Losses, for additional
information.
OFF-BALANCE
SHEET ARRANGEMENTS
We enter into certain business arrangements that are not
recorded on our consolidated balance sheets or may be recorded
in amounts that differ from the full contract or notional amount
of the transaction. Most of these arrangements relate to our
financial guarantee and securitization activity for which we
record guarantee assets and obligations and the related
securitized assets are owned by third parties. See
ITEM 2. FINANCIAL INFORMATION ANNUAL
MD&A OFF-BALANCE SHEET ARRANGEMENTS in
our Registration Statement and NOTE 2: FINANCIAL
GUARANTEES AND SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS in the notes to our consolidated financial
statements for more discussion of our off-balance sheet
arrangements.
As part of our credit guarantee business, we routinely enter
into forward purchase and sale commitments for mortgage loans
and mortgage-related securities. Some of these commitments are
accounted for as derivatives. Their fair values are reported as
either derivative assets, net or derivative liabilities, net on
our consolidated balance sheets. We also have purchase
commitments primarily related to mortgage swap transactions and,
to a lesser extent, commitments to purchase multifamily mortgage
loans and revenue bonds that are not accounted for as
derivatives and are not recorded on our consolidated balance
sheets. These non-derivative commitments totaled
$337.5 billion and $173.4 billion at June 30,
2008 and December 31, 2007, respectively. Such commitments
are not accounted for as derivatives and are not recorded on our
consolidated balance sheets. These mortgage purchase contracts
contain no penalty or liquidated damages clauses based on our
inability to take delivery of mortgage loans.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP
requires us to make a number of judgments, estimates and
assumptions that affect the reported amounts of our assets,
liabilities, income and expenses. Certain of our accounting
policies, as well as estimates we make, are critical to the
presentation of our financial condition and results of
operations. They often require management to make difficult,
complex or subjective judgments and estimates, at times,
regarding matters that are inherently uncertain. Actual results
could differ from our estimates and different judgments and
assumptions related to these policies and estimates could have a
material impact on our consolidated financial statements.
Our critical accounting policies and estimates relate to:
(a) valuation of a significant portion of assets and
liabilities; (b) allowances for loan losses and reserve for
guarantee losses; (c) application of the static effective
yield method to amortize the guarantee obligation;
(d) application of the effective interest method; and
(e) impairment recognition on investments in securities.
For additional information about our critical accounting
policies and estimates and other significant accounting
policies, including recently issued accounting pronouncements,
see ITEM 2. FINANCIAL INFORMATION ANNUAL
MD&A CRITICAL ACCOUNTING POLICIES AND
ESTIMATES and ITEM 13. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in our
Registration Statement.
Fair
Value Measurements
Effective January 1, 2008, we adopted SFAS 157, which
defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. See
Determination of Fair Value for additional
information about fair value hierarchy and measurements. Fair
value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Upon adoption of
SFAS 157 on January 1, 2008, we began estimating the
fair value of our newly-issued guarantee obligations at their
inception using the practical expedient provided by FIN 45,
as amended by SFAS 157. Using the practical expedient, the
initial guarantee obligation is recorded at an amount equal to
the fair value of compensation received, inclusive of all rights
related to the transaction, in exchange for our guarantee. As a
result, we no longer record estimates of deferred gains or
immediate, day one losses on most guarantees. In
addition, amortization of the guarantee obligation will now more
closely follow our economic release from risk under the
guarantee. However, all unamortized amounts recorded prior to
January 1, 2008 will continue to be deferred and amortized
using existing amortization methods with respect to disclosure
of the fair value of our guarantee obligation on the Fair Value
Balance Sheet. Valuation of the guarantee obligation subsequent
to initial recognition will use current pricing assumptions and
related inputs. For information regarding our fair value methods
and assumptions, see NOTE 14: FAIR VALUE
DISCLOSURES to our consolidated financial statements.
Determination
of Fair Value
SFAS 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value based on the inputs a market participant would use at
the measurement date. Observable inputs reflect market data
obtained from independent sources. Unobservable inputs reflect
assumptions based on the best information available under the
circumstances. Unobservable inputs are used to measure fair
value to the extent that observable inputs are not available, or
in situations where there is little, if any, market activity for
an asset or liability at the measurement date. We use valuation
techniques that maximize the use of observable inputs, where
available, and minimize the use of unobservable inputs.
The three levels of the fair value hierarchy under SFAS 157
are described below:
|
|
|
|
Level 1:
|
Quoted prices (unadjusted) in active markets that are accessible
at the measurement date for identical assets or liabilities;
|
|
|
Level 2:
|
Quoted prices for similar assets and liabilities in active
markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; inputs other than
quoted market prices that are observable for the asset or
liability; and inputs that are derived principally from or
corroborated by observable market data for substantially the
full term of the assets; and
|
|
|
Level 3:
|
Unobservable inputs for the asset or liability that are
supported by little or no market activity and that are
significant to the fair values.
|
Our Level 1 financial instruments consist of
exchange-traded derivatives where quoted prices exist for the
exact instrument in an active market. Our Level 2
instruments generally consist of high credit quality agency
mortgage-related securities, commercial mortgage-backed
securities, non-mortgage-related asset-backed securities,
interest-rate swaps, option-based derivatives and
foreign-currency denominated debt. These instruments are
generally valued through one of the
following methods: (a) dealer or pricing service inputs
with the value derived by comparison to recent transactions or
similar securities and adjusting for differences in prepayment
or liquidity characteristics; or (b) modeled through an
industry standard modeling technique that relies upon observable
inputs such as discount rates and prepayment assumptions.
Our Level 3 assets primarily consist of non-agency
residential mortgage-related securities and our guarantee asset.
While the non-agency mortgage-related securities were supported
by little or no market activity in the first half of 2008, we
value our non-agency mortgage-related securities based primarily
on prices received from third party pricing services and prices
received from dealers. The techniques used to value these
instruments generally are either (a) a comparison to
transactions of instruments with similar collateral and risk
profiles; or (b) industry standard modeling such as the
discounted cash flow model. For a large majority of the
securities we value using dealers and pricing services, we
obtain at least three independent prices. When multiple prices
are received, we use the median of the prices. The models and
related assumptions used by the dealers and pricing services are
owned and managed by them. However, we have an understanding of
their processes used to develop the prices provided to us based
on our ongoing due diligence. We generally have formal
discussions with our pricing service vendors on a quarterly
basis to maintain a current understanding of the processes and
inputs they use to develop prices. We make no adjustments to the
individual prices we receive from third party pricing services
or dealers for non-agency mortgage-related securities backed by
subprime and
Alt-A
mortgage loans beyond calculating median prices and discarding
certain prices that are not valid based on our validation
procedures.
These validation procedures are executed to ensure that the
individual prices we receive are consistent with our
observations of the marketplace and prices that are provided to
us by other dealers or pricing services. These processes include
automated checks of prices for reasonableness based on
variations from prices provided in previous periods, comparisons
of prices to internally calculated expected prices and relative
value comparisons based on specific characteristics of
securities. To the extent we determine that a price provided to
us is outside established parameters, we will further examine
the price including follow up discussions with the specific
pricing service or dealer and ultimately not use that price if
we are not able to determine the price is valid. All of these
processes are executed prior to the use of the prices in the
financial statement process. We validate our prices using
sources different from the sources we use to obtain the price.
This process is performed by an independent control
group separate from that which is responsible for obtaining
the prices. The pricing and related validation process is
overseen by a senior management valuation committee that is
responsible for reviewing all pricing judgments, methods,
controls and results. The prices provided to us consider the
existence of credit enhancements, including monoline insurance
coverage and the current lack of liquidity in the marketplace.
For a description of how we determine the fair value of our
guarantee asset, see NOTE 2: FINANCIAL GUARANTEES AND
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS to our
consolidated financial statements.
We periodically evaluate our valuation techniques and may change
them to improve our fair value estimates, to accommodate market
developments or to compensate for changes in data availability
and reliability or other operational constraints. We review a
range of market quotes from pricing services or dealers and
perform analysis of internal valuations on a monthly basis to
confirm the reasonableness of the valuations. See ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK Interest-Rate Risk and Other Market Risks
for a discussion of market risks and our interest-rate
sensitivity measures, PMVS and duration gap. In addition, see
NOTE 2: FINANCIAL GUARANTEES AND SECURITIZED
INTERESTS IN MORTGAGE-RELATED ASSETS to our consolidated
financial statements for a sensitivity analysis of the fair
value of our guarantee asset and other retained interests and
the key assumptions utilized in fair value measurements.
Table 47 below summarizes our assets and liabilities
measured at fair value on a recurring basis by level in the
valuation hierarchy at June 30, 2008.
Table 47
Summary of Assets and Liabilities at Fair Value on a Recurring
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
|
securities
|
|
|
|
|
|
Guarantee
|
|
|
|
|
|
denominated
|
|
|
|
|
|
|
|
|
|
Available-for-sale,
|
|
|
Trading, at
|
|
|
Available-for-sale,
|
|
|
Derivative
|
|
|
asset, at
|
|
|
|
|
|
in foreign
|
|
|
Derivative
|
|
|
|
|
|
|
at fair value
|
|
|
fair value
|
|
|
at fair value
|
|
|
assets,
net(1)
|
|
|
fair value
|
|
|
Total(1)
|
|
|
currencies
|
|
|
liabilities,
net(1)
|
|
|
Total(1)
|
|
|
|
(dollars in millions)
|
|
|
Level 1
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
1
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Level 2
|
|
|
74
|
|
|
|
98
|
|
|
|
100
|
|
|
|
99
|
|
|
|
|
|
|
|
79
|
|
|
|
100
|
|
|
|
97
|
|
|
|
98
|
|
Level 3
|
|
|
26
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
21
|
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total GAAP Fair Value
|
|
$
|
512,197
|
|
|
$
|
159,594
|
|
|
$
|
12,869
|
|
|
$
|
441
|
|
|
$
|
11,019
|
|
|
$
|
696,120
|
|
|
$
|
15,202
|
|
|
$
|
910
|
|
|
$
|
16,112
|
|
|
|
(1)
|
Based on gross fair value of
derivative assets and derivative liabilities before counterparty
netting, cash collateral netting, net trade/settle receivable or
payable and net derivative interest receivable or payable.
|
Changes
in Level 3 recurring fair value measurements
At June 30, 2008, we measured and recorded on a recurring
basis $149.6 billion, or approximately 21% of total assets,
at fair value using significant unobservable inputs
(Level 3), before the impact of counterparty and cash
collateral netting across the levels of the fair value
hierarchy. Our Level 3 assets primarily consist of
non-agency residential mortgage-related securities and our
guarantee asset. We also measured and recorded on a recurring
basis $0.3 billion, or 1% of total liabilities, at fair
value using significant unobservable inputs, before the impact
of counterparty and cash collateral netting across the levels of
the fair value hierarchy. Our Level 3 liabilities consist
of derivative liabilities, net.
In the second quarter of 2008, our Level 3 assets decreased
by $7.2 billion, primarily in our non-agency
mortgage-related securities, backed by subprime and
Alt-A
mortgage loans. This decline was mainly attributable to
substantial monthly remittances of principal repayments from the
underlying collateral. Our net transfer of Level 2 assets
to Level 3 during the second quarter of 2008 was
$0.1 billion. See LIQUIDITY AND CAPITAL
RESOURCES Retained Portfolio for more
information.
During the six months ended June 30, 2008, our Level 3
assets increased significantly because the market for non-agency
mortgage-related securities backed by subprime and
Alt-A
mortgages continued to experience a significant reduction in
liquidity and wider spreads, as investor demand for these assets
decreased. In addition, we have observed more variability in the
quotations received from dealers and third-party pricing
services. Consequently, we transferred $154.0 billion of
Level 2 assets to Level 3 during the six months ended
June 30, 2008. These transfers were primarily within
non-agency mortgage-related securities backed by subprime and
Alt-A
mortgage loans where inputs that are significant to their
valuation became limited or unavailable. We concluded that the
prices on these securities received from pricing services and
dealers were reflective of significant unobservable inputs. We
recorded $10.8 billion in additional losses primarily in
AOCI on these transferred assets during the six months ended
June 30, 2008, which were included in our Level 3
reconciliation. See NOTE 14: FAIR VALUE
DISCLOSURES Table 14.2 Fair Value
Measurements of Assets and Liabilities Using Significant
Unobservable Inputs to our consolidated financial
statements for the Level 3 reconciliation. For discussion
of types and characteristics of mortgage loans underlying our
mortgage-related securities, see CREDIT RISKS and
CONSOLIDATED BALANCE SHEETS ANALYSIS
Table 15 Characteristics of Mortgage Loans and
Mortgage-Related Securities in our Retained Portfolio.
Controls
over Fair Value Measurement
To ensure that fair value measurements are appropriate and
reliable, we employ control processes to validate the techniques
and models we use. These control processes include review and
approval of new transaction types, price verification and review
of valuation judgments, methods and models. Where applicable,
valuations are back tested comparing the settlement prices to
where the fair values were measured. Where models are employed
to assist in the measurement of fair value, no material changes
were made to those models during the periods presented. However,
inputs used by those models are regularly updated for changes in
the underlying data, assumptions, valuation inputs, or market
conditions.
Groups independent of our trading and investing function,
including the Financial Valuation Control group and the
Valuation Committee, participate in the review and validation
process. Financial Valuation Control performs monthly
independent verification by comparing the methodology driven
price to other market source data (to the extent available), and
uses independent analytics to determine if assigned fair values
are reasonable. Financial Valuation Controls review
targets coverage across all products with increased attention to
higher risk/impact valuations. The Valuation Committee, with
senior representation from business areas, Enterprise Risk
Oversight and Finance, evaluates and approves all significant
valuation adjustments, judgments, methods, controls and results.
In addition, the Model Governance Committee is responsible for
the review and approval of the pricing models used in our fair
value measurements.
The Fair
Value Option for Financial Assets and Financial
Liabilities
Effective January 1, 2008, we adopted SFAS 159 for
certain eligible financial instruments. This statement permits
entities to choose to measure many financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value in order to improve
financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions. The effect of the
first measurement to fair value is reported as a
cumulative-effect adjustment to the beginning balance of
retained earnings. We elected the fair value option for certain
available-for-sale mortgage-related securities that were
identified as an economic offset to the changes in fair value of
the guarantee asset caused by interest rate movements,
foreign-currency denominated debt and investments in securities
classified as available-for-sale securities and identified as
within the scope of Emerging Issues Task
Force 99-20,
Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That
Continue to be Held by a Transferor in Securitized Financial
Assets. As a result of the adoption of SFAS 159,
we recognized a $1.0 billion after-tax increase to our
beginning retained earnings at January 1, 2008. For
additional information on the impact of the election of the fair
value option, see NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Changes in Accounting
Principles to our consolidated financial statements. For
information regarding our fair value methods and assumptions,
see NOTE 14: FAIR VALUE DISCLOSURES to our
consolidated financial statements.
OUR
PORTFOLIOS
Guaranteed
PCs and Structured Securities
Guaranteed PCs and Structured Securities represent the unpaid
principal balances of the mortgage-related assets we issue or
otherwise guarantee. Our guaranteed PCs are pass-through
securities that represent undivided interests in trusts that own
pools of mortgages we have purchased. Our Structured Securities
represent beneficial interests in pools of PCs and certain other
types of mortgage-related assets. We create Structured
Securities primarily by resecuritizing our PCs or previously
issued Structured Securities as collateral. Similar to our PCs,
we guarantee the payment of principal and interest to the
holders of all tranches of our Structured Securities. By issuing
Structured Securities, we seek to provide liquidity to
alternative sectors of the mortgage market. We do not charge a
management and guarantee fee for Structured Securities backed by
our PCs or previously issued Structured Securities, because the
underlying collateral is already guaranteed, so there is no
incremental credit risk to us as a result of resecuritization.
We also issue Structured Securities to third parties in
exchanges for non-Freddie Mac mortgage-related securities, which
we refer to as Structured Transactions. See ITEM 1.
BUSINESS Our Business Segments
Single-family Guarantee Segment in our Registration
Statement and CREDIT RISKS Mortgage Credit
Risk herein for detailed discussion and other information
on our PCs and Structured Securities, including Structured
Transactions.
In addition to our mortgage security guarantees, during the six
months ended June 30, 2007 we entered into
$3.2 billion of long-term standby commitments for mortgage
assets held by third parties that require us to purchase loans
from lenders when the loans subject to these commitments meet
certain delinquency criteria. We did not enter into any
long-term standby commitments in the six months ended
June 30, 2008. Instead, we terminated $18.8 billion of
our previously issued long-term standby commitments in the
six months ended June 30, 2008. The majority of the
loans previously covered by these commitments were subsequently
securitized as PCs and included in issuances. We have included
these long-term standby commitments in the reported activity and
balances of our guaranteed PCs and Structured Securities
portfolio. Long-term standby commitments represented
approximately 1% and 2% of the balance of our PCs and Structured
Securities portfolio at June 30, 2008 and December 31,
2007, respectively. Table 48 presents the distribution of
underlying mortgage assets for our PCs and Structured Securities.
Table 48
Issued Guaranteed PCs and Structured
Securities(1)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
PCs and Structured Securities backed by Freddie Mac
mortgage-related securities:
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
Conventional:
|
|
|
|
|
|
|
|
|
30-year
fixed-rate(2)
|
|
$
|
1,183,853
|
|
|
$
|
1,091,212
|
|
20-year
fixed-rate
|
|
|
69,895
|
|
|
|
72,225
|
|
15-year
fixed-rate
|
|
|
260,865
|
|
|
|
272,490
|
|
ARMs/adjustable-rate
|
|
|
86,127
|
|
|
|
91,219
|
|
Option
ARMs(3)
|
|
|
1,652
|
|
|
|
1,853
|
|
Interest-only(4)
|
|
|
164,619
|
|
|
|
159,028
|
|
Balloon/resets
|
|
|
13,556
|
|
|
|
17,242
|
|
Conforming-jumbo
|
|
|
471
|
|
|
|
|
|
FHA/VA
|
|
|
1,299
|
|
|
|
1,283
|
|
Rural Housing Service and other federally guaranteed loans
|
|
|
125
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
1,782,462
|
|
|
|
1,706,684
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Conventional and other
|
|
|
13,927
|
|
|
|
10,658
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
13,927
|
|
|
|
10,658
|
|
|
|
|
|
|
|
|
|
|
Structured Securities backed by non-Freddie Mac mortgage-related
securities:
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
Ginnie Mae
Certificates(5)
|
|
|
1,150
|
|
|
|
1,268
|
|
Structured
Transactions(6)
|
|
|
25,413
|
|
|
|
19,323
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Structured Transactions
|
|
|
851
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
Total Structured Securities backed by non-Freddie Mac
mortgage-related securities
|
|
|
27,414
|
|
|
|
21,491
|
|
|
|
|
|
|
|
|
|
|
Total issued guaranteed PCs and Structured Securities
|
|
$
|
1,823,803
|
|
|
$
|
1,738,833
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on unpaid principal balances
of the securities and excludes mortgage-related securities
traded, but not yet settled. Also includes long-term standby
commitments for mortgage assets held by third parties that
require that we purchase loans from lenders when these loans
meet certain delinquency criteria.
|
(2)
|
Portfolio balances include
$1.9 billion and $1.8 billion of
40-year
fixed-rate mortgages at June 30, 2008 and December 31,
2007, respectively.
|
(3)
|
Excludes Option ARM mortgage loans
that back our Structured Transactions. See endnote (6) for
additional information.
|
(4)
|
Includes both fixed- and
variable-rate interest-only loans.
|
(5)
|
Ginnie Mae Certificates that
underlie the Structured Securities are backed by FHA/VA loans.
|
(6)
|
Represents Structured Securities
backed by non-agency securities that include prime, FHA/VA and
subprime mortgage loan issuances. Includes $10.3 billion
and $12.8 billion of securities backed by Option ARM
mortgage loans at June 30, 2008 and December 31, 2007,
respectively.
|
Table 49
Freddie Macs Total Mortgage Portfolio and Segment
Portfolio
Composition(1)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
Total mortgage portfolio:
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
Single-family mortgage loans
|
|
$
|
27,195
|
|
|
$
|
24,589
|
|
Multifamily mortgage loans
|
|
|
63,828
|
|
|
|
57,569
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
91,023
|
|
|
|
82,158
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities in our retained
portfolio
|
|
|
413,907
|
|
|
|
356,970
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related securities, agency
|
|
|
74,143
|
|
|
|
47,836
|
|
Non-Freddie Mac mortgage-related securities, non-agency
|
|
|
212,725
|
|
|
|
233,849
|
|
|
|
|
|
|
|
|
|
|
Total non-Freddie Mac mortgage-related securities
|
|
|
286,868
|
|
|
|
281,685
|
|
|
|
|
|
|
|
|
|
|
Total retained
portfolio(2)
|
|
|
791,798
|
|
|
|
720,813
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities held by third
parties:
|
|
|
|
|
|
|
|
|
Single-family PCs and Structured Securities
|
|
|
1,389,518
|
|
|
|
1,363,613
|
|
Single-family Structured Transactions
|
|
|
8,245
|
|
|
|
9,351
|
|
Multifamily PCs and Structured Securities
|
|
|
11,282
|
|
|
|
7,999
|
|
Multifamily Structured Transactions
|
|
|
851
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
Total guaranteed PCs and Structured Securities held by third
parties
|
|
|
1,409,896
|
|
|
|
1,381,863
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
$
|
2,201,694
|
|
|
$
|
2,102,676
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities:
|
|
|
|
|
|
|
|
|
In our retained portfolio
|
|
|
413,907
|
|
|
|
356,970
|
|
Held by third parties
|
|
|
1,409,896
|
|
|
|
1,381,863
|
|
|
|
|
|
|
|
|
|
|
Total Guaranteed PCs and Structured Securities
|
|
$
|
1,823,803
|
|
|
$
|
1,738,833
|
|
|
|
|
|
|
|
|
|
|
Segment portfolios:
|
|
|
|
|
|
|
|
|
Investments Mortgage-related investment
portfolio:
|
|
|
|
|
|
|
|
|
Single-family mortgage loans
|
|
$
|
27,195
|
|
|
$
|
24,589
|
|
Guaranteed PCs and Structured Securities in our retained
portfolio
|
|
|
413,907
|
|
|
|
356,970
|
|
Non-Freddie Mac mortgage-related securities in our retained
portfolio
|
|
|
286,868
|
|
|
|
281,685
|
|
|
|
|
|
|
|
|
|
|
Total Investments Mortgage-related investment
portfolio(3)
|
|
$
|
727,970
|
|
|
$
|
663,244
|
|
|
|
|
|
|
|
|
|
|
Single-family Guarantee Credit guarantee
portfolio:
|
|
|
|
|
|
|
|
|
Single-family PCs and Structured Securities in our retained
portfolio
|
|
$
|
392,944
|
|
|
$
|
343,071
|
|
Single-family PCs and Structured Securities held by third parties
|
|
|
1,389,518
|
|
|
|
1,363,613
|
|
Single-family Structured Transactions in our retained portfolio
|
|
|
18,318
|
|
|
|
11,240
|
|
Single-family Structured Transactions held by third parties
|
|
|
8,245
|
|
|
|
9,351
|
|
|
|
|
|
|
|
|
|
|
Total Single-family Guarantee Credit guarantee
portfolio
|
|
$
|
1,809,025
|
|
|
$
|
1,727,275
|
|
|
|
|
|
|
|
|
|
|
Multifamily Guarantee and loan portfolios:
|
|
|
|
|
|
|
|
|
Multifamily PCs and Structured Securities
|
|
$
|
13,927
|
|
|
$
|
10,658
|
|
Multifamily Structured Transactions
|
|
|
851
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
Total Multifamily guarantee portfolio
|
|
|
14,778
|
|
|
|
11,558
|
|
Multifamily loan portfolio
|
|
|
63,828
|
|
|
|
57,569
|
|
|
|
|
|
|
|
|
|
|
Total Multifamily Guarantee and loan
portfolios
|
|
$
|
78,606
|
|
|
$
|
69,127
|
|
|
|
|
|
|
|
|
|
|
Less: Guaranteed PCs and Structured Securities in our retained
portfolio(4)
|
|
|
(413,907
|
)
|
|
|
(356,970
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
$
|
2,201,694
|
|
|
$
|
2,102,676
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on unpaid principal balance
and excludes mortgage loans and mortgage-related securities
traded, but not yet settled. For PCs and Structured Securities,
the balance reflects reported security balances and not the
unpaid principal of the underlying mortgage loans. Mortgage
loans held in our retained portfolio reflect the unpaid
principal balance of the loan.
|
(2)
|
See CONSOLIDATED BALANCE
SHEETS ANALYSIS Table 15
Characteristics of Mortgage Loans and Mortgage-Related
Securities in our Retained Portfolio for a reconciliation
of our retained portfolio amounts shown in this table to the
amounts shown under such caption in conformity with GAAP on our
consolidated balance sheets.
|
(3)
|
Includes certain assets related to
Single-family Guarantee activities and Multifamily activities.
|
(4)
|
The amount of PCs and Structured
Securities in our retained portfolio is included in both our
segments mortgage-related and guarantee portfolios and
thus deducted in order to reconcile to our total mortgage
portfolio. These securities are managed by the Investments
segment, which receives related interest income; however, the
Single-family and Multifamily segments manage and receive
associated management and guarantee fees.
|
During the six months ended June 30, 2008 and 2007, our
total mortgage portfolio grew at an annualized rate of 9% and
14%, respectively. Our new business purchases consist of
mortgage loans and non-Freddie Mac mortgage-related securities
that are purchased for our retained portfolio or serve as
collateral for our issued PCs and Structured Securities. We
generate a significant portion of our mortgage purchase volume
through several key mortgage lenders. Table 50 summarizes
purchases into our total mortgage portfolio.
Table 50
Total Mortgage Portfolio Activity
Detail(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Purchase
|
|
|
|
|
|
Purchase
|
|
|
|
|
|
Purchase
|
|
|
|
|
|
Purchase
|
|
|
|
Amount
|
|
|
Amounts
|
|
|
Amount
|
|
|
Amounts
|
|
|
Amount
|
|
|
Amounts
|
|
|
Amount
|
|
|
Amounts
|
|
|
|
(dollars in millions)
|
|
|
New business purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-year
amortizing
fixed-rate(2)
|
|
$
|
95,896
|
|
|
|
71
|
%
|
|
$
|
76,511
|
|
|
|
63
|
%
|
|
$
|
192,555
|
|
|
|
74
|
%
|
|
$
|
152,300
|
|
|
|
64
|
%
|
15-year
amortizing fixed-rate
|
|
|
12,279
|
|
|
|
9
|
|
|
|
5,429
|
|
|
|
4
|
|
|
|
21,368
|
|
|
|
8
|
|
|
|
10,139
|
|
|
|
4
|
|
ARMs/adjustable-rate(3)
|
|
|
5,853
|
|
|
|
4
|
|
|
|
4,513
|
|
|
|
4
|
|
|
|
7,576
|
|
|
|
3
|
|
|
|
8,974
|
|
|
|
3
|
|
Interest-only(4)
|
|
|
8,084
|
|
|
|
6
|
|
|
|
31,771
|
|
|
|
26
|
|
|
|
18,060
|
|
|
|
7
|
|
|
|
60,910
|
|
|
|
25
|
|
Balloon/resets(5)
|
|
|
9
|
|
|
|
<1
|
|
|
|
16
|
|
|
|
<1
|
|
|
|
124
|
|
|
|
<1
|
|
|
|
32
|
|
|
|
<1
|
|
Conforming-jumbo
|
|
|
471
|
|
|
|
<1
|
|
|
|
|
|
|
|
|
|
|
|
471
|
|
|
|
<1
|
|
|
|
|
|
|
|
|
|
FHA/VA(6)
|
|
|
214
|
|
|
|
<1
|
|
|
|
18
|
|
|
|
<1
|
|
|
|
242
|
|
|
|
<1
|
|
|
|
144
|
|
|
|
1
|
|
Rural Housing Service and other federally guaranteed loans
|
|
|
59
|
|
|
|
<1
|
|
|
|
50
|
|
|
|
<1
|
|
|
|
91
|
|
|
|
<1
|
|
|
|
86
|
|
|
|
<1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
122,865
|
|
|
|
90
|
|
|
|
118,308
|
|
|
|
97
|
|
|
|
240,487
|
|
|
|
92
|
|
|
|
232,585
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily mortgage purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional and other
|
|
|
5,294
|
|
|
|
4
|
|
|
|
2,515
|
|
|
|
2
|
|
|
|
11,739
|
|
|
|
5
|
|
|
|
5,654
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
5,294
|
|
|
|
4
|
|
|
|
2,515
|
|
|
|
2
|
|
|
|
11,739
|
|
|
|
5
|
|
|
|
5,654
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage purchases
|
|
|
128,159
|
|
|
|
94
|
|
|
|
120,823
|
|
|
|
99
|
|
|
|
252,226
|
|
|
|
97
|
|
|
|
238,239
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related securities purchased for
Structured Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ginnie Mae Certificates
|
|
|
2
|
|
|
|
<1
|
|
|
|
33
|
|
|
|
<1
|
|
|
|
2
|
|
|
|
<1
|
|
|
|
40
|
|
|
|
<1
|
|
Structured Transactions
|
|
|
8,139
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
8,245
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Transactions
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Freddie Mac mortgage-related securities
purchased for Structured Securities
|
|
|
8,141
|
|
|
|
6
|
|
|
|
233
|
|
|
|
1
|
|
|
|
8,247
|
|
|
|
3
|
|
|
|
240
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family and multifamily mortgage purchases and
total non-Freddie Mac mortgage-related securities purchased for
Structured Securities
|
|
$
|
136,300
|
|
|
|
100
|
%
|
|
$
|
121,056
|
|
|
|
100
|
%
|
|
$
|
260,473
|
|
|
|
100
|
%
|
|
$
|
238,479
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related securities purchased into
our retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$
|
17,082
|
|
|
|
|
|
|
$
|
782
|
|
|
|
|
|
|
$
|
18,262
|
|
|
|
|
|
|
$
|
1,103
|
|
|
|
|
|
Variable-rate
|
|
|
7,606
|
|
|
|
|
|
|
|
2,738
|
|
|
|
|
|
|
|
15,809
|
|
|
|
|
|
|
|
3,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total agency mortgage-related securities
|
|
|
24,688
|
|
|
|
|
|
|
|
3,520
|
|
|
|
|
|
|
|
34,071
|
|
|
|
|
|
|
|
4,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
Variable-rate
|
|
|
|
|
|
|
|
|
|
|
17,284
|
|
|
|
|
|
|
|
618
|
|
|
|
|
|
|
|
38,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
|
|
|
|
|
|
|
|
17,553
|
|
|
|
|
|
|
|
618
|
|
|
|
|
|
|
|
38,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
547
|
|
|
|
|
|
|
|
2,923
|
|
|
|
|
|
|
|
547
|
|
|
|
|
|
|
|
3,101
|
|
|
|
|
|
Variable-rate
|
|
|
445
|
|
|
|
|
|
|
|
3,791
|
|
|
|
|
|
|
|
660
|
|
|
|
|
|
|
|
9,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage-backed securities
|
|
|
992
|
|
|
|
|
|
|
|
6,714
|
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
12,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage revenue bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
32
|
|
|
|
|
|
|
|
558
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
803
|
|
|
|
|
|
Variable-rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage revenue bonds
|
|
|
32
|
|
|
|
|
|
|
|
558
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities
|
|
|
1,024
|
|
|
|
|
|
|
|
24,825
|
|
|
|
|
|
|
|
1,884
|
|
|
|
|
|
|
|
52,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-Freddie Mac mortgage-related securities
purchased into our retained portfolio
|
|
|
25,712
|
|
|
|
|
|
|
|
28,345
|
|
|
|
|
|
|
|
35,955
|
|
|
|
|
|
|
|
57,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new business purchases
|
|
$
|
162,012
|
|
|
|
|
|
|
$
|
149,401
|
|
|
|
|
|
|
$
|
296,428
|
|
|
|
|
|
|
$
|
295,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage purchases with credit
enhancements(7)
|
|
|
19
|
%
|
|
|
|
|
|
|
18
|
%
|
|
|
|
|
|
|
22
|
%
|
|
|
|
|
|
|
16
|
%
|
|
|
|
|
Mortgage
liquidations(8)
|
|
$
|
107,535
|
|
|
|
|
|
|
$
|
87,691
|
|
|
|
|
|
|
$
|
193,966
|
|
|
|
|
|
|
$
|
168,752
|
|
|
|
|
|
Mortgage liquidations rate
(annualized)(8)
|
|
|
20
|
%
|
|
|
|
|
|
|
19
|
%
|
|
|
|
|
|
|
18
|
%
|
|
|
|
|
|
|
19
|
%
|
|
|
|
|
Freddie Mac securities repurchased into our retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$
|
75,431
|
|
|
|
|
|
|
$
|
21,439
|
|
|
|
|
|
|
$
|
91,098
|
|
|
|
|
|
|
$
|
37,983
|
|
|
|
|
|
Variable-rate
|
|
|
15,623
|
|
|
|
|
|
|
|
7,799
|
|
|
|
|
|
|
|
21,500
|
|
|
|
|
|
|
|
18,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Freddie Mac securities repurchased into our retained
portfolio
|
|
$
|
91,054
|
|
|
|
|
|
|
$
|
29,238
|
|
|
|
|
|
|
$
|
112,598
|
|
|
|
|
|
|
$
|
56,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on unpaid principal balances.
Excludes mortgage loans and mortgage-related securities traded
but not yet settled. Also excludes net additions to our retained
portfolio for delinquent mortgage loans and balloon/reset
mortgages purchased out of PC pools.
|
(2)
|
Includes
40-year and
20-year
fixed-rate mortgages.
|
(3)
|
Includes amortizing ARMs with 1-,
3-, 5-, 7- and
10-year
initial fixed-rate periods.
|
(4)
|
Represents loans where the borrower
pays interest only for a period of time before the borrower
begins making principal payments.
|
(5)
|
Represents mortgages whose terms
require lump sum principal payments on contractually determined
future dates unless the borrower qualifies for and elects an
extension of the maturity date at an adjusted interest-rate.
|
(6)
|
Excludes FHA/Department of Veterans
Affairs, or VA, loans that back Structured Transactions.
|
(7)
|
Excludes mortgage-related
securities backed by Ginnie Mae Certificates.
|
(8)
|
Based on total mortgage portfolio.
|
FORWARD-LOOKING
STATEMENTS
We regularly communicate information concerning our business
activities to investors, securities analysts, the news media and
others as part of our normal operations. Some of these
communications, including this Form 10-Q, contain
forward-looking statements pertaining to our current
expectations and objectives for financial reporting, remediation
efforts, future business plans, capital plans, economic and
market conditions and trends, market share, credit losses, and
results of operations and financial condition on a GAAP, Segment
Earnings and fair value basis. Forward-looking statements are
often accompanied by, and identified with, terms such as
objective, expect, trend,
forecast, believe, intend,
could, future and similar phrases. These
statements are not historical facts, but rather represent our
expectations based on current information, plans, judgments,
assumptions, estimates and projections. Forward-looking
statements involve known and unknown risks, uncertainties and
other factors, some of which are beyond our control. You should
not unduly rely on our forward-looking statements. Actual
results may differ materially from the expectations expressed in
the forward-looking statements we make as a result of various
factors, including those factors described in the RISK
FACTORS section of this Form 10-Q and the comparably
captioned section in our Registration Statement and:
|
|
|
|
|
changes in applicable legislative or regulatory requirements,
including regulation of the subprime or non-traditional mortgage
product markets, implementation of the Regulatory Reform Act,
changes to our charter, changes to affordable housing goals
regulation, changes to regulatory capital requirements or the
exercise or assertion of regulatory or administrative authority
beyond historical practice;
|
|
|
|
our ability to effectively identify and manage credit risk
and/or changes to the credit environment;
|
|
|
|
changes in general regional, national or international economic,
business or market conditions and competitive pressures,
including consolidation of mortgage originators, employment
rates and home price appreciation;
|
|
|
|
our ability to effectively implement our business strategies and
manage the risks in our business, including our efforts to
improve the supply and liquidity of, and demand for, our
products;
|
|
|
|
our ability to effectively identify and manage interest-rate and
other market risks, including the levels and volatilities of
interest rates, as well as the shape and slope of the yield
curves;
|
|
|
|
incomplete or inaccurate information provided by customers and
counterparties, or adverse changes in the financial condition of
our customers and counterparties;
|
|
|
|
changes to legislative, regulatory or voluntary limits on the
growth of any aspect of our business activities, including our
retained portfolio;
|
|
|
|
our ability to effectively identify, assess, evaluate, manage,
mitigate or remediate control deficiencies and risks, including
material weaknesses and significant deficiencies, in our
internal control over financial reporting and disclosure
controls and procedures;
|
|
|
|
changes in our judgments, assumptions, forecasts or estimates
regarding rates of growth in our business, spreads we expect to
earn, required capital levels and the timing and impact of
capital transactions;
|
|
|
|
our ability to effectively manage and implement changes,
developments or impacts of accounting or tax standards and
interpretations or changes to our accounting policies or
estimates;
|
|
|
|
the availability of debt financing and equity capital in
sufficient quantity and at attractive rates to support growth in
our retained portfolio, to refinance maturing debt and to meet
regulatory capital requirements;
|
|
|
|
changes in pricing, valuation or other methodologies, models,
assumptions, judgments, estimates and/or other measurement
techniques or their respective reliability;
|
|
|
|
changes in mortgage-to-debt option-adjusted spreads;
|
|
|
|
the availability of options, interest-rate and currency swaps
and other derivative financial instruments of the types and
quantities and with acceptable counterparties needed for
investment funding and risk management purposes;
|
|
|
|
the rate of growth in total outstanding U.S. residential
mortgage debt and the size of the U.S. residential mortgage
market;
|
|
|
|
volatility of reported results due to changes in the fair value
of certain instruments or assets;
|
|
|
|
preferences of originators in selling into the secondary market;
|
|
|
|
changes to our underwriting and disclosure requirements or
investment standards for mortgage-related products;
|
|
|
|
investor preferences for mortgage loans and mortgage-related and
debt securities compared to other investments;
|
|
|
|
|
|
the ability of our financial, accounting, data processing and
other operating systems or infrastructure and those of our
vendors to process the complexity and volume of our transactions;
|
|
|
|
borrower preferences for fixed-rate mortgages or adjustable-rate
mortgages;
|
|
|
|
the occurrence of a major natural or other disaster in
geographic areas in which portions of our total mortgage
portfolio are concentrated;
|
|
|
|
other factors and assumptions described in this
Form 10-Q
or our Registration Statement, including in the
MD&A section;
|
|
|
|
our assumptions and estimates regarding the foregoing and our
ability to anticipate the foregoing factors and their impacts;
and
|
|
|
|
market reactions to the foregoing.
|
We undertake no obligation to update forward-looking statements
we make to reflect events or circumstances after the date of
this
Form 10-Q
or to reflect the occurrence of unanticipated events.
RISK
MANAGEMENT AND DISCLOSURE COMMITMENTS
In October 2000, we announced our voluntary adoption of a series
of commitments designed to enhance market discipline, liquidity
and capital. In September 2005, we entered into a written
agreement with OFHEO that updated these commitments and set
forth a process for implementing them. The letters between us
and OFHEO dated September 1, 2005 constituting the written
agreement are available on the Investor Relations page of our
website at www.freddiemac.com/investors/reports.html. The status
of our commitments at June 30, 2008 follows:
|
|
|
|
Description
|
|
Status
|
|
|
1. Periodic Issuance of Subordinated Debt:
We will issue Freddie
SUBS®
securities for public secondary market trading that are rated by
no fewer than two nationally recognized statistical rating
organizations.
Freddie
SUBS®
securities will be issued in an amount such that the sum of
total capital (core capital plus general allowance for losses)
and the outstanding balance of Qualifying subordinated
debt will equal or exceed the sum of (i) 0.45% of
outstanding PCs and Structured Securities we guaranteed; and
(ii) 4% of total on-balance sheet assets. Qualifying
subordinated debt is discounted by one-fifth each year during
the instruments last five years before maturity; when the
remaining maturity is less than one year, the instrument is
entirely excluded. We will take reasonable steps to maintain
outstanding subordinated debt of sufficient size to promote
liquidity and reliable market quotes on market values.
Each quarter, we will submit to OFHEO
calculations of the quantity of qualifying Freddie
SUBS®
securities and total capital as part of our quarterly capital
report.
Every six months, we will submit to OFHEO a
subordinated debt management plan that includes any issuance
plans for the six months following the date of the plan.
|
|
During the six months ended June 30, 2008, we
did not issue or call any Freddie
SUBS®
securities.
We reported to OFHEO that at June 30, 2008, we
had $46.6 billion in total capital plus qualifying
subordinated debt, resulting in a surplus of $5.1 billion.
We have submitted our semi-annual subordinated debt
management plan to OFHEO.
|
|
2. Liquidity Management and Contingency Planning:
We will maintain a contingency plan providing
for at least three months liquidity without relying upon
the issuance of unsecured debt. We will also periodically test
the contingency plan in consultation with OFHEO.
|
|
We have in place a liquidity contingency plan, upon
which we report to OFHEO on a weekly basis. We periodically test
this plan in accordance with our agreement with OFHEO.
|
|
3. Interest-Rate Risk Disclosures:
We will provide public disclosure of our
duration gap, Portfolio Market Value Sensitivity-Level, or
PMVS-L and
Portfolio Market Value Sensitivity-Yield Curve, or
PMVS-YC
interest-rate risk sensitivity results on a monthly basis. See
ITEM 2. FINANCIAL INFORMATION ANNUAL
MD&A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK Interest-Rate Risk and Other
Market Risks Portfolio Market Value Sensitivity
and Measurement of Interest-Rate Risk in our
Registration Statement for a description of these metrics.
|
|
For the six months ended June 30, 2008, our
duration gap averaged zero months,
PMVS-L
averaged $459 million and
PMVS-YC
averaged $70 million. Our 2008 monthly average
duration gap, PMVS results and related disclosures are provided
in our Monthly Volume Summary which is available on our website,
www.freddiemac.com/investors/volsum.
|
|
|
|
|
|
Description
|
|
Status
|
|
|
4. Credit Risk Disclosures:
We will make quarterly assessments of the
expected impact on credit losses from an immediate 5% decline in
single-family home prices for the entire U.S. We will disclose
the impact in present value terms and measure our estimated
losses both before and after receipt of private mortgage
insurance claims and other credit enhancements.
|
|
Our quarterly credit risk sensitivity estimates are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Receipt
of Credit
Enhancements(1)
|
|
After Receipt
of Credit
Enhancements(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Present
Value, or NPV(3)
|
|
NPV
Ratio(4)
|
|
NPV(3)
|
|
NPV
Ratio(4)
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06/30/08
|
|
$5,151
|
|
28.3 bps
|
|
$4,241
|
|
23.3 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
03/31/08
|
|
$4,922
|
|
27.8 bps
|
|
$3,914
|
|
22.1 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/07(5)
|
|
$4,036
|
|
23.2 bps
|
|
$3,087
|
|
17.8 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
09/30/07
|
|
$1,959
|
|
11.7 bps
|
|
$1,415
|
|
8.4 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06/30/07
|
|
$1,768
|
|
11.0 bps
|
|
$1,292
|
|
8.1 bps
|
|
|
|
|
|
|
|
|
(1) Assumes that none of the
credit enhancements currently covering our mortgage loans has
any mitigating impact on our credit losses.
|
|
|
|
|
|
(2) Assumes we collect amounts
due from credit enhancement providers after giving effect to
certain assumptions about counterparty default rates.
|
|
|
|
|
|
(3) Based on the single-family
mortgage portfolio, excluding Structured Securities backed by
Ginnie Mae Certificates.
|
|
|
|
|
|
(4) Calculated as the ratio of
NPV of increase in credit losses to the single-family mortgage
portfolio, defined in footnote (3) above.
|
|
|
|
|
|
(5) The significant increase
in our credit risk sensitivity estimates beginning in Q4 2007
was primarily attributable to changes in our assumptions
employed to calculate the credit risk sensitivity disclosure.
Given deterioration in housing fundamentals at the end of 2007,
we modified our assumptions for slower recovery of forecasted
home prices subsequent to the immediate 5% decline.
|
|
|
|
|
5. Public Disclosure of Risk Rating:
We will seek to obtain a rating, that will
be continuously monitored by at least one nationally recognized
statistical rating organization, assessing our
risk-to-the-government or independent financial
strength.
|
|
At June 30, 2008, our
risk-to-the-government rating from
Standard & Poors was AA with a negative
outlook. On July 25, 2008, S&P placed our AA
risk-to-the-government rating on CreditWatch
Negative, which overrode the negative outlook designation.
|
|
|
At June 30, 2008, our Bank Financial
Strength rating from Moodys was B+ with a negative
outlook. On May 14, 2008 Moodys had downgraded our
Bank Financial Strength from A− to B+. On
July 15, 2008, Moodys downgraded our Bank
Financial Strength rating from B+ to B and placed
the rating on review for possible further downgrade.
|
|
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Our retained portfolio investment and credit guarantee
activities expose us to three broad categories of risk:
(a) interest-rate risk and other market risks;
(b) credit risks; and (c) operational risks. Risk
management is a critical aspect of our business. See
ITEM 1A. RISK FACTORS in our Registration
Statement and PART II ITEM 1A. RISK
FACTORS in this
Form 10-Q
for further information regarding these and other risks. We
manage risk through a framework that recognizes primary risk
ownership and management by our business areas. Within this
framework, our executive management responsible for independent
risk oversight monitors performance against our risk management
strategies and established risk limits and reporting thresholds,
identifies and assesses potential issues and provides oversight
regarding changes in business processes and activities. See
ITEM 2. MD&A CREDIT RISKS for
a discussion of credit risks. See ITEM 4T. CONTROLS
AND PROCEDURES in this
Form 10-Q
for a discussion of disclosure controls and procedures and
internal control over financial reporting.
Interest-Rate
Risk and Other Market Risks
Our interest-rate risk management objective is to protect
stockholder value consistent with our housing mission and safe
and sound operations in all interest-rate environments. We
believe a disciplined approach to interest-rate risk management
is essential to maintaining a strong and durable capital base
and uninterrupted access to debt and equity capital markets. See
ITEM 2. FINANCIAL INFORMATION ANNUAL
MD&A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK Interest-Rate Risk and Other
Market Risks in our Registration Statement for more
information.
PMVS
and Duration Gap
Our primary interest-rate risk measures are PMVS and duration
gap. PMVS is measured in two ways, one measuring the estimated
sensitivity of our portfolio market value to parallel moves in
interest rates (Portfolio Market Value Sensitivity-Level or
PMVS-L) and
the other to nonparallel movements (Portfolio Market Value
Sensitivity Yield Curve or
PMVS-YC). In
December 2007, we changed our PMVS reporting to present
estimated
dollars-at-risk,
rather than a percentage of fair value of common equity. We
believe this change provides more relevant information and
better represents our overall level and low exposure to adverse
interest-rate movements given the substantial reduction in the
fair value of common equity that occurred during 2007.
The 50 basis point shift and 25 basis point change in
slope of the London Interbank Offered Rate, or LIBOR, yield
curve used for our PMVS measures represent events that are
expected to have an approximately 5% probability of occurring
over a one-month time horizon. Our PMVS and duration gap
estimates are determined using models that involve our best
judgment of interest-rate and prepayment assumptions.
Accordingly, while we believe that PMVS and duration gap are
useful risk management tools, they should be understood as
estimates rather than as precise measurements. Methodologies
used to calculate interest-rate risk sensitivity disclosures are
periodically changed on a prospective basis to reflect
improvements in the underlying processes. During the second
quarter of 2008, we made changes to reflect new prepayment and
OAS assumptions related to certain floating rate securities.
PMVS
Results
Table 51 provides estimated
PMVS-L and
PMVS-YC
results. Table 51 also provides
PMVS-L
estimates assuming an immediate 100 basis point shift in
the LIBOR yield curve. Because we do not hedge all prepayment
risk, the duration of our mortgage assets changes more rapidly
as changes in interest rates increase. Accordingly, as shown in
Table 51, the
PMVS-L
results based on a 100 basis point shift in the LIBOR curve
are disproportionately higher than the
PMVS-L
results based on a 50 basis point shift in the LIBOR curve.
Table 51
PMVS Assuming Shifts of the LIBOR Yield Curve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Pre-Tax Loss in
|
|
|
Portfolio Market Value
|
|
|
PMVS-YC
|
|
PMVS-L
|
|
|
25 bps
|
|
50 bps
|
|
100 bps
|
|
|
(in millions)
|
|
At:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
$
|
56
|
|
|
$
|
336
|
|
|
$
|
1,298
|
|
December 31, 2007
|
|
$
|
42
|
|
|
$
|
533
|
|
|
$
|
1,681
|
|
Derivatives have enabled us to keep our interest-rate risk
exposure at consistently low levels in a wide range of
interest-rate environments. Table 52 shows that the low
PMVS-L risk
levels for the periods presented would generally have been
higher if we had not used derivatives to manage our
interest-rate risk exposure.
Table 52
Derivative Impact on
PMVS-L
(50 bps)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Derivatives
|
|
After Derivatives
|
|
Effect of Derivatives
|
|
|
(in millions)
|
|
At:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
$
|
3,820
|
|
|
$
|
336
|
|
|
$
|
(3,484
|
)
|
December 31, 2007
|
|
$
|
1,371
|
|
|
$
|
533
|
|
|
$
|
(838
|
)
|
The disclosure in our Monthly Volume Summary reports, which are
available on our website at www.freddiemac.com and in current
reports on Form 8-K we file with the SEC, reflects the
average of the daily
PMVS-L,
PMVS-YC and
duration gap estimates for a given reporting period (a month,
quarter or year).
Duration
Gap Results
Our estimated average duration gap for both the months of June
2008 and December 2007 was zero months. A positive duration gap
indicates that the duration of our assets exceeds the duration
of our liabilities, which, from a net perspective, represents a
greater exposure of our fair value of equity to rising interest
rates as a result of decreases in asset values exceeding
decreases in liability values. A duration gap of zero implies
that the duration of our assets equals the duration of our
liabilities. As a result, the change in value of assets from an
instantaneous rate move, either up or down, will be accompanied
by an equal and offsetting move in the value of liabilities,
thus leaving the fair value of equity unchanged. A negative
duration gap indicates that the duration of our liabilities
exceeds the duration of our assets, which, from a net
perspective, implies that the fair value of equity will increase
in value when interest rates rise and decrease in value when
interest rates fall.
Use of
Derivatives and Interest-Rate Risk Management
We use derivatives primarily to:
|
|
|
|
|
hedge forecasted issuances of debt and synthetically create
callable and non-callable funding;
|
|
|
|
regularly adjust or rebalance our funding mix in order to more
closely match changes in the interest-rate characteristics of
our mortgage assets; and
|
|
|
|
hedge foreign-currency exposure (see ITEM 2.
FINANCIAL INFORMATION ANNUAL MD&A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK Sources of Interest-Rate Risk and Other
Market Risks Foreign-Currency Risk in our
Registration Statement).
|
Types
of Derivatives
The derivatives we use to hedge interest-rate and
foreign-currency risks are common in the financial markets. We
principally use the following types of derivatives:
|
|
|
|
|
LIBOR- and Euro Interbank Offered Rate, or Euribor-, based
interest-rate swaps;
|
|
|
|
LIBOR- and Treasury-based options (including swaptions);
|
|
|
|
LIBOR- and Treasury-based exchange-traded futures; and
|
|
|
|
Foreign-currency swaps.
|
Derivative
Positions
In addition to swaps, futures and options, our derivative
positions include the following:
Written Options and Swaptions. Written
call and put swaptions are sold to counterparties allowing them
the option to enter into receive- and pay-fixed swaps,
respectively. Written call and put options on mortgage-related
securities give the counterparty the right to execute a contract
under specified terms, which generally occurs when we are in a
liability position. We use these written options and swaptions
to manage convexity risk over a wide range of interest rates. We
may, from time to time, write other derivative contracts such as
caps, floors and interest-rate futures.
Forward Purchase and Sale
Commitments. We routinely enter into forward
purchase and sale commitments for mortgage loans and
mortgage-related securities. Most of these commitments are
derivatives subject to the requirements of
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended.
Swap Guarantee Derivatives. We issue
swap guarantee derivatives that guarantee the payments on
(a) multifamily mortgage loans that are originated and held
by state and municipal housing finance agencies to support
tax-exempt multifamily housing revenue bonds and
(b) Freddie Mac pass-through certificates which are backed
by tax-exempt multifamily housing revenue bonds and related
taxable bonds
and/or
loans. In connection with some of these guarantees, we may also
guarantee the sponsors or the borrowers performance
as a counterparty on any related interest-rate swaps used to
mitigate interest-rate risk.
Credit Derivatives. We enter into
credit derivatives, including risk-sharing agreements. Under
these risk-sharing agreements, default losses on specific
mortgage loans delivered by sellers are compared to default
losses on reference pools of mortgage loans with similar
characteristics. Based upon the results of that comparison, we
remit or receive payments based upon the default performance of
the referenced pools of mortgage loans. In addition, we enter
into agreements whereby we assume credit risk for mortgage loans
held by third parties in exchange for a monthly fee. We are
obligated to purchase any of the mortgage loans that become
120 days delinquent.
In addition, we have purchased mortgage loans subject to debt
cancellation contracts, which provide mortgage debt or payment
cancellation for borrowers who experience unanticipated losses
of income dependent on a covered event. The rights
and obligations under these agreements have been assigned to the
servicers. However, in the event the servicer does not perform
as required by contract, under our guarantee, we would be
obligated to make the required contractual payments.
ITEM 4T.
CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that the information
we are required to disclose in our financial reports is
recorded, processed, summarized and reported within the time
periods specified by the SEC rules and forms and that such
information is accumulated and communicated to senior
management, as appropriate, to allow timely decisions regarding
required disclosure. In designing our disclosure controls and
procedures, we recognize that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, and we must apply judgment in implementing possible
controls and procedures. Management, including the
Companys Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the design and operation of
our disclosure controls and procedures as of June 30, 2008.
Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of June 30, 2008,
the Companys disclosure controls and procedures were
effective.
Changes
in Internal Control Over Financial Reporting
We have evaluated whether any changes in our internal control
over financial reporting during the quarter ended June 30,
2008 have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting. Based on that evaluation, we have concluded that no
such changes have occurred during the quarter.
Progress
Toward Remediation of Significant Deficiencies
Significant deficiencies that existed in our internal control
over financial reporting as of March 31, 2008, and our
progress toward their remediation as of June 30, 2008, are
summarized below. Progress toward remediation is reported in the
following stages:
|
|
|
|
|
In process We are in the process of designing and
implementing controls to correct identified internal control
deficiencies and conducting ongoing evaluations to ensure all
deficiencies have been identified.
|
|
|
|
Remediation activities implemented We have designed
and implemented the controls that we believe are necessary to
remediate the identified internal control deficiencies.
|
|
|
|
Remediated After a sufficient period of operation of
the controls implemented to remediate the control deficiencies,
management has evaluated the controls and found them to be
operating effectively.
|
|
|
|
|
|
|
|
|
|
|
|
Remediation
|
|
Remediation
|
|
|
Progress as of
|
|
Progress as of
|
|
|
March 31, 2008
|
|
June 30, 2008
|
|
Guarantee Asset/Guarantee Obligation Governance
|
|
|
|
|
|
|
|
|
Our process for valuation of and accounting for our guarantee
asset and guarantee obligation was complex, manually intensive
and dependent on end-user computing solutions, which resulted in
an unacceptable likelihood of risk of significant error.
|
|
|
Remediation
activities
implemented
|
|
|
|
Remediated
|
|
|
|
|
|
|
|
|
|
|
Tax Basis Balance Sheet
|
|
|
|
|
|
|
|
|
We do not maintain a tax basis balance sheet to support deferred
tax accounting under GAAP, which could result in balance sheet
misclassifications and potential income statement adjustments.
|
|
|
In process
|
|
|
|
In process
|
|
|
|
|
|
|
|
|
|
|
Oversight of Models and Model Applications
|
|
|
|
|
|
|
|
|
Our model governance and monitoring procedures did not
effectively ensure that changes to and our use of models in our
financial reporting process are appropriate.
|
|
|
Remediation
activities
implemented
|
|
|
|
Remediation
activities
implemented
|
|
|
|
|
|
|
|
|
|
|
IT Security Shared IDs
|
|
|
|
|
|
|
|
|
We have not consistently executed security controls over system
and user accounts that can be used by multiple individuals.
|
|
|
In process
|
|
|
|
In process
|
|
|
|
|
|
|
|
|
|
|
User Access Recertification
|
|
|
|
|
|
|
|
|
We have not effectively executed periodic review and
recertification of user access to financial applications and
related technical platforms.
|
|
|
In process
|
|
|
|
In process
|
|
|
|
|
|
|
|
|
|
|
Consideration of Controls in Application Design
|
|
|
|
|
|
|
|
|
Our business or technical design requirements for financial
application development projects did not adequately consider
requirements for automating process controls.
|
|
|
In process
|
|
|
|
Remediated
|
|
|
|
|
|
|
|
|
|
|
Pre-Deployment Application Testing and Maintenance
Approval
|
|
|
|
|
|
|
|
|
We did not consistently execute the appropriate testing of new
financial applications prior to their deployment nor did we
consistently obtain the appropriate approvals of application
maintenance changes.
|
|
|
In process
|
|
|
|
Remediated
|
|
FREDDIE
MAC
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars in millions, except share-related amounts)
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
1,320
|
|
|
$
|
1,075
|
|
|
$
|
2,563
|
|
|
$
|
2,141
|
|
Mortgage-related securities
|
|
|
8,380
|
|
|
|
8,784
|
|
|
|
16,513
|
|
|
|
17,335
|
|
Cash and investments
|
|
|
520
|
|
|
|
966
|
|
|
|
1,040
|
|
|
|
1,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
10,220
|
|
|
|
10,825
|
|
|
|
20,116
|
|
|
|
21,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
(1,637
|
)
|
|
|
(2,249
|
)
|
|
|
(3,681
|
)
|
|
|
(4,457
|
)
|
Long-term debt
|
|
|
(6,711
|
)
|
|
|
(7,331
|
)
|
|
|
(13,436
|
)
|
|
|
(14,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on debt securities
|
|
|
(8,348
|
)
|
|
|
(9,580
|
)
|
|
|
(17,117
|
)
|
|
|
(18,964
|
)
|
Due to Participation Certificate investors
|
|
|
|
|
|
|
(121
|
)
|
|
|
|
|
|
|
(224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(8,348
|
)
|
|
|
(9,701
|
)
|
|
|
(17,117
|
)
|
|
|
(19,188
|
)
|
Expense related to derivatives
|
|
|
(343
|
)
|
|
|
(331
|
)
|
|
|
(672
|
)
|
|
|
(662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,529
|
|
|
|
793
|
|
|
|
2,327
|
|
|
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income (includes interest on guarantee
asset of $243, $130, $458 and $257, respectively)
|
|
|
757
|
|
|
|
591
|
|
|
|
1,546
|
|
|
|
1,219
|
|
Gains (losses) on guarantee asset
|
|
|
1,114
|
|
|
|
820
|
|
|
|
(280
|
)
|
|
|
297
|
|
Income on guarantee obligation
|
|
|
769
|
|
|
|
474
|
|
|
|
1,938
|
|
|
|
904
|
|
Derivative gains (losses)
|
|
|
115
|
|
|
|
318
|
|
|
|
(130
|
)
|
|
|
(206
|
)
|
Gains (losses) on investment activity
|
|
|
(3,327
|
)
|
|
|
(540
|
)
|
|
|
(2,108
|
)
|
|
|
(522
|
)
|
Unrealized gains (losses) on foreign-currency denominated debt
recorded at fair value
|
|
|
569
|
|
|
|
|
|
|
|
(816
|
)
|
|
|
|
|
Gains (losses) on debt retirement
|
|
|
(29
|
)
|
|
|
89
|
|
|
|
276
|
|
|
|
96
|
|
Recoveries on loans impaired upon purchase
|
|
|
121
|
|
|
|
72
|
|
|
|
347
|
|
|
|
107
|
|
Foreign-currency gains (losses), net
|
|
|
|
|
|
|
(333
|
)
|
|
|
|
|
|
|
(530
|
)
|
Other income
|
|
|
75
|
|
|
|
58
|
|
|
|
122
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
164
|
|
|
|
1,549
|
|
|
|
895
|
|
|
|
1,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
(241
|
)
|
|
|
(227
|
)
|
|
|
(472
|
)
|
|
|
(440
|
)
|
Professional services
|
|
|
(55
|
)
|
|
|
(104
|
)
|
|
|
(127
|
)
|
|
|
(193
|
)
|
Occupancy expense
|
|
|
(18
|
)
|
|
|
(16
|
)
|
|
|
(33
|
)
|
|
|
(30
|
)
|
Other administrative expenses
|
|
|
(90
|
)
|
|
|
(95
|
)
|
|
|
(169
|
)
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
(404
|
)
|
|
|
(442
|
)
|
|
|
(801
|
)
|
|
|
(845
|
)
|
Provision for credit losses
|
|
|
(2,537
|
)
|
|
|
(447
|
)
|
|
|
(3,777
|
)
|
|
|
(695
|
)
|
Real estate owned operations expense
|
|
|
(265
|
)
|
|
|
(16
|
)
|
|
|
(473
|
)
|
|
|
(30
|
)
|
Losses on certain credit guarantees
|
|
|
|
|
|
|
(150
|
)
|
|
|
(15
|
)
|
|
|
(327
|
)
|
Losses on loans purchased
|
|
|
(120
|
)
|
|
|
(264
|
)
|
|
|
(171
|
)
|
|
|
(480
|
)
|
Low-income housing tax credit partnerships
|
|
|
(108
|
)
|
|
|
(135
|
)
|
|
|
(225
|
)
|
|
|
(243
|
)
|
Minority interest in earnings of consolidated subsidiaries
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
(18
|
)
|
Other expenses
|
|
|
(106
|
)
|
|
|
(56
|
)
|
|
|
(178
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
(3,545
|
)
|
|
|
(1,519
|
)
|
|
|
(5,648
|
)
|
|
|
(2,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax (expense) benefit
|
|
|
(1,852
|
)
|
|
|
823
|
|
|
|
(2,426
|
)
|
|
|
293
|
|
Income tax (expense) benefit
|
|
|
1,031
|
|
|
|
(94
|
)
|
|
|
1,454
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(821
|
)
|
|
$
|
729
|
|
|
$
|
(972
|
)
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and issuance costs on redeemed
preferred stock (including $, $, $ and $6 of
issuance costs on redeemed preferred stock, respectively)
|
|
|
(231
|
)
|
|
|
(95
|
)
|
|
|
(503
|
)
|
|
|
(190
|
)
|
Amount allocated to participating security option holders
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available (applicable) to common
stockholders
|
|
$
|
(1,053
|
)
|
|
$
|
632
|
|
|
$
|
(1,476
|
)
|
|
$
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.63
|
)
|
|
$
|
0.97
|
|
|
$
|
(2.28
|
)
|
|
$
|
0.62
|
|
Diluted
|
|
$
|
(1.63
|
)
|
|
$
|
0.96
|
|
|
$
|
(2.28
|
)
|
|
$
|
0.61
|
|
Weighted average common shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
646,868
|
|
|
|
652,877
|
|
|
|
646,603
|
|
|
|
657,103
|
|
Diluted
|
|
|
646,868
|
|
|
|
655,784
|
|
|
|
646,603
|
|
|
|
659,365
|
|
Dividends per common share
|
|
$
|
0.25
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
$
|
1.00
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
FREDDIE
MAC
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2008
|
|
|
December 31,
|
|
|
|
(unaudited)
|
|
|
2007
|
|
|
|
(in millions, except
|
|
|
|
share-related amounts)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Retained portfolio
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
Held-for-investment,
at amortized cost (net of allowances for loan losses of $468 and
$256, respectively)
|
|
$
|
81,533
|
|
|
$
|
76,347
|
|
Held-for-sale,
at lower-of-cost-or-fair-value
|
|
|
7,536
|
|
|
|
3,685
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans, net
|
|
|
89,069
|
|
|
|
80,032
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value (includes $21,896 and $17,010, respectively,
pledged as collateral that may be repledged)
|
|
|
512,197
|
|
|
|
615,665
|
|
Trading, at fair value
|
|
|
159,594
|
|
|
|
14,089
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
671,791
|
|
|
|
629,754
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio
|
|
|
760,860
|
|
|
|
709,786
|
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
43,553
|
|
|
|
8,574
|
|
Investments:
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
12,869
|
|
|
|
35,101
|
|
Securities purchased under agreements to resell and federal
funds sold
|
|
|
15,265
|
|
|
|
6,562
|
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
71,687
|
|
|
|
50,237
|
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables, net
|
|
|
6,247
|
|
|
|
5,003
|
|
Derivative assets, net
|
|
|
441
|
|
|
|
827
|
|
Guarantee asset, at fair value
|
|
|
11,019
|
|
|
|
9,591
|
|
Real estate owned, net
|
|
|
2,580
|
|
|
|
1,736
|
|
Deferred tax asset, net
|
|
|
18,399
|
|
|
|
10,304
|
|
Low-income housing tax credit partnerships equity investments
|
|
|
4,362
|
|
|
|
4,568
|
|
Other assets
|
|
|
3,448
|
|
|
|
2,316
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
879,043
|
|
|
$
|
794,368
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
stockholders equity
|
|
|
|
|
|
|
|
|
Debt securities, net
|
|
|
|
|
|
|
|
|
Senior debt:
|
|
|
|
|
|
|
|
|
Due within one year (includes $362 at fair value at
June 30, 2008)
|
|
$
|
326,303
|
|
|
$
|
295,921
|
|
Due after one year (includes $14,840 at fair value at
June 30, 2008)
|
|
|
505,013
|
|
|
|
438,147
|
|
Subordinated debt, due after one year
|
|
|
4,496
|
|
|
|
4,489
|
|
|
|
|
|
|
|
|
|
|
Total debt securities, net
|
|
|
835,812
|
|
|
|
738,557
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
7,208
|
|
|
|
7,864
|
|
Guarantee obligation
|
|
|
14,022
|
|
|
|
13,712
|
|
Derivative liabilities, net
|
|
|
910
|
|
|
|
582
|
|
Reserve for guarantee losses on Participation Certificates
|
|
|
5,345
|
|
|
|
2,566
|
|
Other liabilities
|
|
|
2,667
|
|
|
|
4,187
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
865,964
|
|
|
|
767,468
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 2, 3, 11 and 12)
|
|
|
|
|
|
|
|
|
Minority interests in consolidated subsidiaries
|
|
|
131
|
|
|
|
176
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, at redemption value
|
|
|
14,109
|
|
|
|
14,109
|
|
Common stock, $0.21 par value, 806,000,000 shares authorized,
725,863,886 shares issued and 647,015,003 shares and
646,266,701 shares outstanding, respectively
|
|
|
152
|
|
|
|
152
|
|
Additional paid-in capital
|
|
|
864
|
|
|
|
871
|
|
Retained earnings
|
|
|
26,128
|
|
|
|
26,909
|
|
Accumulated other comprehensive income (loss), or AOCI, net of
taxes, related to:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
(20,719
|
)
|
|
|
(7,040
|
)
|
Cash flow hedge relationships
|
|
|
(3,418
|
)
|
|
|
(4,059
|
)
|
Defined benefit plans
|
|
|
(43
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
Total AOCI, net of taxes
|
|
|
(24,180
|
)
|
|
|
(11,143
|
)
|
Treasury stock, at cost, 78,848,883 shares and
79,597,185 shares, respectively
|
|
|
(4,125
|
)
|
|
|
(4,174
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
12,948
|
|
|
|
26,724
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
879,043
|
|
|
$
|
794,368
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
FREDDIE
MAC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
(in millions)
|
|
|
Preferred stock, at redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
464
|
|
|
$
|
14,109
|
|
|
|
132
|
|
|
$
|
6,109
|
|
Preferred stock issuances
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
1,600
|
|
Preferred stock redemptions
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, end of period
|
|
|
464
|
|
|
|
14,109
|
|
|
|
184
|
|
|
|
7,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
726
|
|
|
|
152
|
|
|
|
726
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, end of period
|
|
|
726
|
|
|
|
152
|
|
|
|
726
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
871
|
|
|
|
|
|
|
|
962
|
|
Stock-based compensation
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
42
|
|
Income tax benefit from stock-based compensation
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
1
|
|
Preferred stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
Common stock issuances
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
(27
|
)
|
Real Estate Investment Trust preferred stock repurchase
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital, end of period
|
|
|
|
|
|
|
864
|
|
|
|
|
|
|
|
955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
26,909
|
|
|
|
|
|
|
|
31,372
|
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
1,023
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year, as adjusted
|
|
|
|
|
|
|
27,932
|
|
|
|
|
|
|
|
31,553
|
|
Net income (loss)
|
|
|
|
|
|
|
(972
|
)
|
|
|
|
|
|
|
596
|
|
Preferred stock dividends declared
|
|
|
|
|
|
|
(503
|
)
|
|
|
|
|
|
|
(184
|
)
|
Common stock dividends declared
|
|
|
|
|
|
|
(329
|
)
|
|
|
|
|
|
|
(663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, end of period
|
|
|
|
|
|
|
26,128
|
|
|
|
|
|
|
|
31,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
(11,143
|
)
|
|
|
|
|
|
|
(8,451
|
)
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year, as adjusted
|
|
|
|
|
|
|
(11,993
|
)
|
|
|
|
|
|
|
(8,451
|
)
|
Changes in unrealized gains (losses) related to
available-for-sale securities, net of reclassification
adjustments
|
|
|
|
|
|
|
(12,825
|
)
|
|
|
|
|
|
|
(3,058
|
)
|
Changes in unrealized gains (losses) related to cash flow hedge
relationships, net of reclassification adjustments
|
|
|
|
|
|
|
637
|
|
|
|
|
|
|
|
458
|
|
Changes in defined benefit plans
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI, net of taxes, end of period
|
|
|
|
|
|
|
(24,180
|
)
|
|
|
|
|
|
|
(11,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
80
|
|
|
|
(4,174
|
)
|
|
|
65
|
|
|
|
(3,230
|
)
|
Common stock issuances
|
|
|
(1
|
)
|
|
|
49
|
|
|
|
(1
|
)
|
|
|
35
|
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, end of period
|
|
|
79
|
|
|
|
(4,125
|
)
|
|
|
76
|
|
|
|
(3,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
|
|
|
$
|
12,948
|
|
|
|
|
|
|
$
|
24,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
$
|
(972
|
)
|
|
|
|
|
|
$
|
596
|
|
Changes in other comprehensive income (loss), net of taxes, net
of reclassification adjustments
|
|
|
|
|
|
|
(12,187
|
)
|
|
|
|
|
|
|
(2,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
$
|
(13,159
|
)
|
|
|
|
|
|
$
|
(1,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
FREDDIE
MAC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(972
|
)
|
|
$
|
596
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
|
|
|
|
|
|
|
|
|
Hedge accounting gains
|
|
|
(4
|
)
|
|
|
|
|
Derivative (gains) losses
|
|
|
(587
|
)
|
|
|
337
|
|
Asset related amortization premiums, discounts and
basis adjustments
|
|
|
8
|
|
|
|
62
|
|
Debt related amortization premiums and discounts on
certain debt securities and basis adjustments
|
|
|
4,760
|
|
|
|
5,391
|
|
Net discounts paid on retirements of debt
|
|
|
(5,187
|
)
|
|
|
(4,240
|
)
|
Gains on debt retirement
|
|
|
(276
|
)
|
|
|
(96
|
)
|
Provision for credit losses
|
|
|
3,777
|
|
|
|
695
|
|
Low-income housing tax credit partnerships
|
|
|
225
|
|
|
|
243
|
|
Losses on loans purchased
|
|
|
171
|
|
|
|
480
|
|
Losses on investment activity
|
|
|
2,120
|
|
|
|
550
|
|
Foreign-currency loss, net
|
|
|
|
|
|
|
530
|
|
Unrealized losses on foreign-currency denominated debt recorded
at fair value
|
|
|
816
|
|
|
|
|
|
Deferred income taxes
|
|
|
(1,628
|
)
|
|
|
(1,230
|
)
|
Purchases of
held-for-sale
mortgages
|
|
|
(21,885
|
)
|
|
|
(9,886
|
)
|
Sales of
held-for-sale
mortgages
|
|
|
17,806
|
|
|
|
9,157
|
|
Repayments of
held-for-sale
mortgages
|
|
|
294
|
|
|
|
56
|
|
Due to Participation Certificates and Structured Securities Trust
|
|
|
(694
|
)
|
|
|
|
|
Change in trading securities
|
|
|
|
|
|
|
(2,204
|
)
|
Change in accounts and other receivables, net
|
|
|
(1,615
|
)
|
|
|
(471
|
)
|
Change in amounts due to Participation Certificate investors, net
|
|
|
|
|
|
|
2,400
|
|
Change in accrued interest payable
|
|
|
(200
|
)
|
|
|
145
|
|
Change in income taxes payable
|
|
|
(594
|
)
|
|
|
320
|
|
Change in guarantee asset, at fair value
|
|
|
(1,427
|
)
|
|
|
(1,910
|
)
|
Change in guarantee obligation
|
|
|
368
|
|
|
|
1,359
|
|
Other, net
|
|
|
251
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by operating activities
|
|
|
(4,473
|
)
|
|
|
2,306
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of trading securities
|
|
|
(78,273
|
)
|
|
|
|
|
Proceeds from sales of trading securities
|
|
|
9,289
|
|
|
|
|
|
Proceeds from maturities of trading securities
|
|
|
9,974
|
|
|
|
|
|
Purchases of
available-for-sale
securities
|
|
|
(155,571
|
)
|
|
|
(157,291
|
)
|
Proceeds from sales of
available-for-sale
securities
|
|
|
19,781
|
|
|
|
37,008
|
|
Proceeds from maturities of
available-for-sale
securities
|
|
|
153,259
|
|
|
|
120,317
|
|
Purchases of
held-for-investment
mortgages
|
|
|
(8,641
|
)
|
|
|
(8,178
|
)
|
Repayments of
held-for-investment
mortgages
|
|
|
2,075
|
|
|
|
4,980
|
|
Increase in restricted cash
|
|
|
(369
|
)
|
|
|
|
|
Net proceeds (payments) from mortgage insurance and acquisitions
and dispositions of real estate owned
|
|
|
(631
|
)
|
|
|
813
|
|
Net increase in securities purchased under agreements to resell
and federal funds sold
|
|
|
(8,702
|
)
|
|
|
(4,473
|
)
|
Derivative premiums and terminations and swap collateral, net
|
|
|
939
|
|
|
|
207
|
|
Investments in low-income housing tax credit partnerships
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(56,870
|
)
|
|
|
(6,674
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term debt
|
|
|
588,190
|
|
|
|
472,390
|
|
Repayments of short-term debt
|
|
|
(542,916
|
)
|
|
|
(476,407
|
)
|
Proceeds from issuance of long-term debt
|
|
|
192,731
|
|
|
|
118,776
|
|
Repayments of long-term debt
|
|
|
(140,395
|
)
|
|
|
(108,517
|
)
|
Proceeds from the issuance of preferred stock
|
|
|
|
|
|
|
1,584
|
|
Redemption of preferred stock
|
|
|
|
|
|
|
(600
|
)
|
Payment of cash dividends on preferred stock and common stock
|
|
|
(832
|
)
|
|
|
(847
|
)
|
Excess tax benefits associated with stock-based awards
|
|
|
2
|
|
|
|
3
|
|
Payments of low-income housing tax credit partnerships notes
payable
|
|
|
(433
|
)
|
|
|
(568
|
)
|
Increase (decrease) in cash overdraft
|
|
|
23
|
|
|
|
(16
|
)
|
Other, net
|
|
|
(48
|
)
|
|
|
(981
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
96,322
|
|
|
|
4,817
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
34,979
|
|
|
|
449
|
|
Cash and cash equivalents at beginning of period
|
|
|
8,574
|
|
|
|
11,359
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
43,553
|
|
|
$
|
11,808
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid (received) for:
|
|
|
|
|
|
|
|
|
Debt interest
|
|
$
|
18,465
|
|
|
$
|
18,502
|
|
Swap collateral interest
|
|
|
97
|
|
|
|
226
|
|
Derivative interest carry, net
|
|
|
65
|
|
|
|
(165
|
)
|
Income taxes
|
|
|
1,054
|
|
|
|
607
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Held-for-sale
mortgages securitized and retained as
available-for-sale
securities
|
|
|
|
|
|
|
169
|
|
Transfers from mortgage loans to real estate owned
|
|
|
1,508
|
|
|
|
1,146
|
|
Investments in low-income housing tax credit partnerships
financed by notes payable
|
|
|
|
|
|
|
117
|
|
Transfers from
held-for-sale
mortgages to
held-for-investment
mortgages
|
|
|
|
|
|
|
40
|
|
Transfers from retained portfolio Participation Certificates to
held-for-investment
mortgages
|
|
|
|
|
|
|
893
|
|
Transfers from
available-for-sale
securities to trading securities
|
|
|
87,281
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We are a stockholder-owned government-sponsored enterprise, or
GSE, established by Congress in 1970 to provide a continuous
flow of funds for residential mortgages. Our obligations are
ours alone and are not insured or guaranteed by the U.S.
government, or any other agency or instrumentality of the U.S.
We play a fundamental role in the U.S. housing finance system,
linking the domestic mortgage market and the global capital
markets. Our participation in the secondary mortgage market
includes providing our credit guarantee on securities backed by
residential mortgages originated by mortgage lenders and
investing in mortgage loans and mortgage-related securities that
we hold in our retained portfolio. Through our credit guarantee
activities, we securitize mortgage loans by issuing mortgage
Participation Certificates, or PCs. We also resecuritize
mortgage-related securities that are issued by us or the
Government National Mortgage Association, or Ginnie Mae, as well
as non-agency entities. We also guarantee the payment of
principal and interest with respect to multifamily mortgage
loans that support housing revenue bonds issued by third
parties. Securitized mortgage-related assets that are backed by
PCs and Structured Securities and held by third parties are not
reflected as our assets. We may earn management and guarantee
fees and other upfront compensation for providing our guarantee
and performing management activities (such as ongoing trustee
services, administration of pass-through amounts, paying agent
services, tax reporting and other required services) with
respect to issued PCs and Structured Securities. Our management
activities are essential to and inseparable from our guarantee
activities. We do not provide or charge for the activities
separately. The management and guarantee fee is paid to us over
the life of the related PCs and Structured Securities and
reflected in earnings as management and guarantee income as
accrued.
Basis of
Presentation
The accompanying unaudited consolidated financial statements
include our accounts and those of our subsidiaries, and should
be read in conjunction with the audited consolidated financial
statements and related notes included in our Form 10
Registration Statement filed and declared effective by the SEC
on July 18, 2008, or Registration Statement.
Certain financial information that is normally included in
annual financial statements prepared in conformity with U.S.
generally accepted accounting principles, or GAAP, but is not
required for interim reporting purposes has been condensed or
omitted. Certain amounts in prior periods consolidated
financial statements have been reclassified to conform to the
current presentation. In the opinion of management, all
adjustments, which include only normal recurring adjustments,
have been recorded for a fair statement of our unaudited
consolidated financial statements in conformity with GAAP.
Net income (loss) includes certain adjustments to correct
immaterial errors related to previously reported periods.
Use of
Estimates
The preparation of our consolidated financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date
of these consolidated balance sheets as well as the reported
amounts of revenues and expenses during the reporting periods.
Management has made significant estimates in preparation of the
financial statements, including, but not limited to, valuation
of financial instruments and other assets and liabilities,
amortization of assets and liabilities and allowance for loan
losses and reserves for guarantee losses. Actual results could
be different from these estimates.
Change in
Accounting Principles
Fair
Value Measurements
Effective January 1, 2008, we adopted Statement of
Financial Accounting Standards, or SFAS, No. 157,
Fair Value Measurements, or SFAS 157,
which defines fair value, establishes a framework for measuring
fair value in GAAP and expands disclosures about fair value
measurements. SFAS 157 defines fair value as the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date (also referred to as exit price). The
adoption of SFAS 157 did not cause a cumulative effect
adjustment to our GAAP consolidated financial statements on
January 1, 2008. SFAS 157 amends FASB Interpretation
No., or FIN, 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB
Interpretation No. 34, or FIN 45, to provide
for a practical expedient in measuring the fair value at
inception of a guarantee. Upon adoption of SFAS 157 on
January 1, 2008, we began measuring the fair value of our
newly-issued guarantee obligations at their inception using the
practical expedient provided by FIN 45, as amended by
SFAS 157. Using the practical expedient, the initial
guarantee obligation is recorded at an amount equal to the fair
value of compensation received, inclusive of all rights related
to the transaction, in exchange for our guarantee. As a result,
we no longer record estimates of deferred gains or immediate
day one losses on most guarantees. In addition,
amortization of the guarantee obligation will now more closely
follow our economic release from risk under the guarantee. This
change is further discussed in NOTE 2: FINANCIAL
GUARANTEES AND SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS.
Measurement
Date for Employers Defined Pension and Other
Postretirement Plans
Effective January 1, 2008, we adopted the measurement date
provisions of SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an Amendment of FASB Statements No. 87, 88, 106 and
132(R), or SFAS 158. In accordance with the
standard, we are required to measure our defined plan assets and
obligations as of the date of our consolidated balance sheet and
change the measurement date from September 30 to
December 31. The transition approach we elected for the
change was the
15-month
approach. Under this approach, we continued to use the
measurements determined for our Registration Statement to
estimate the effects of the change. As a result of adoption, we
recognized an $8 million decrease in retained earnings
(after tax) at January 1, 2008 and the impact to AOCI
(after tax) was immaterial.
The
Fair Value Option for Financial Assets and Financial
Liabilities
On January 1, 2008, we adopted SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement
No. 115, or SFAS 159 or the fair value
option, which permits entities to choose to measure many
financial instruments and certain other items at fair value that
are not required to be measured at fair value. The effect of the
first measurement to fair value is reported as a
cumulative-effect adjustment to the opening balance of retained
earnings. We elected the fair value option for certain
available-for-sale mortgage-related securities, foreign-currency
denominated debt, and investments in securities classified as
available-for-sale securities and identified as within the scope
of Emerging Issues Task Force, or EITF,
99-20,
Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial
Assets.
Our election of the fair value option for the items discussed
above was made in an effort to better reflect, in the financial
statements, the economic offsets that exist related to items
that were not previously recognized as changes in fair value
through our consolidated statements of income. As a result of
the adoption, we recognized a $1.0 billion after-tax
increase to our beginning retained earnings at January 1,
2008, representing the effect of changing our measurement basis
to fair value for the above items with the fair value option
elected. For additional information on the election of the fair
value option and SFAS 159, see NOTE 14: FAIR
VALUE DISCLOSURES.
Table 1.1 summarizes the incremental effect on individual line
items on our consolidated balance sheets upon the adoption of
SFAS 159.
Table
1.1 Change in Accounting for the Fair Value
Option Impact on Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Balance Sheet
|
|
|
|
January 1, 2008
|
|
|
Net Gain/(Losses)
|
|
|
January 1, 2008
|
|
|
|
prior to Adoption
|
|
|
upon Adoption
|
|
|
after Adoption
|
|
|
|
(in millions)
|
|
|
Mortgage-related
securities(1)
|
|
$
|
87,281
|
|
|
$
|
|
|
|
$
|
87,281
|
|
Total debt securities,
net(2)
|
|
|
19,091
|
|
|
|
276
|
|
|
|
18,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect adjustment (pre-tax)
|
|
|
|
|
|
|
276
|
|
|
|
|
|
Impact on deferred tax
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect adjustment (net of taxes)
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification from AOCI to retained earnings, net of
taxes(1)
|
|
|
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect adjustments to retained earnings
|
|
|
|
|
|
$
|
1,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Effective January 1, 2008, we
elected the fair value option for certain available-for-sale
mortgage-related securities that were identified as economic
offsets to the changes in fair value of the guarantee asset and
investments in securities classified as available-for-sale
securities and identified as within the scope of
EITF 99-20.
The net gains/(losses) upon adoption represent the
reclassification of the related unrealized gains/(losses) from
AOCI, net of taxes, to retained earnings.
|
(2)
|
Effective January 1, 2008, our
measurement basis for debt securities denominated in a foreign
currency changed from amortized cost to fair value. The
difference between the carrying amount and fair value at the
adoption of SFAS 159 was recorded as a cumulative-effect
adjustment to retained earnings.
|
Recently
Issued Accounting Standards, Not Yet Adopted
Determining
Whether Instruments Granted in Share-based Payment Transactions
Are Participating Securities
In June 2008, the Financial Accounting Standards Board, or FASB,
issued FASB Staff Position No. EITF
03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities, or
FSP EITF
03-6-1. The
guidance in this FSP applies to the calculation of earnings per
share for share-based payment awards with rights to dividends or
dividend equivalents. It clarifies that unvested share-based
payment awards that contain nonforfeitable rights to dividends
or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the
computation of earnings per share pursuant to the two-class
method. FSP EITF
03-6-1 is
effective and will be retrospectively applied by us on
January 1, 2009. We are currently evaluating the impact of
adopting this FSP on our consolidated financial statements.
Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and Consolidation of Variable
Interest Entities, or VIEs
In April 2008, the FASB voted to eliminate Qualifying Special
Purpose Entities, or QSPEs, from the guidance in
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities a
replacement of FASB Statement No. 125, or
SFAS 140. The FASB has also proposed revisions to the
consolidation model prescribed by FIN 46 (revised December
2003),Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51, or
FIN 46(R), to accommodate the removal of the scope
exemption applicable to QSPEs. While the revised standards have
not been finalized and the Boards proposals will be
subject to a public comment period, these changes may have a
significant impact on our consolidated financial statements.
These proposed revisions could be effective as early as January
2010.
Disclosures
about Derivative Instruments and Hedging
Activities
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133,
or SFAS 161. SFAS 161 requires enhanced
disclosures about an entitys derivative and hedging
activities, including objectives and strategies for using
derivatives, fair value amounts of gains and losses on
derivative instruments and credit-risk-related contingent
features in derivative agreements. SFAS 161 is effective
for financial statements issued for fiscal years beginning after
November 15, 2008, with early adoption allowed. We are
currently evaluating the impacts of adopting this standard on
our disclosures as they relate to our consolidated financial
statements.
Noncontrolling
Interests
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
or SFAS 160. A noncontrolling interest (or a minority
interest) is the portion of equity in a subsidiary not
attributable, directly or indirectly, to the parent.
SFAS 160 would require that noncontrolling interests be
presented within equity, instead of between liabilities and
equity. SFAS 160 would also require that net income include
amounts attributable to the noncontrolling interests, instead of
reducing net income by those amounts. SFAS 160 would also
require expanded disclosures. SFAS 160 would be effective
for and retrospectively adopted by us on January 1, 2009.
We have not yet determined the impact of adopting SFAS 160
on our consolidated financial statements.
NOTE 2:
FINANCIAL GUARANTEES AND SECURITIZED
INTERESTS IN MORTGAGE-RELATED ASSETS
Financial
Guarantees
We provide a variety of financial guarantees. For a discussion
of these guarantees see ITEM 13. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING
NOTES NOTE 2: FINANCIAL GUARANTEES AND
TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS in our Registration Statement.
Guaranteed
PCs, Structured Securities and Other Mortgage
Guarantees
We guarantee the payment of principal and interest on issued PCs
and Structured Securities that are backed by pools of mortgage
loans. For our fixed-rate PCs, we guarantee the timely payment
of interest at the applicable PC coupon rate and scheduled
principal payments for the underlying mortgages. For our
adjustable-rate mortgage, or ARM PCs, we guarantee the timely
payment of the weighted average coupon interest rate and the
full and final payment of principal for the underlying
mortgages. We do not guarantee the timely payment of principal
for ARM PCs. To the extent the interest rate is modified and
reduced for a loan underlying a fixed-rate PC, we pay the
shortfall between the original contractual interest rate and the
modified interest rate. To the extent the interest rate is
modified and reduced for a loan underlying an ARM PC, we only
guarantee the timely payment of the modified interest rate and
we are not responsible for any shortfalls between the original
contractual interest rate and the modified interest rate. When
our Structured Securities consist of re-securitizations of PCs,
our guarantee and the impacts of modifications to the interest
rate of the underlying loans operate in the same manner as PCs.
In addition to our guarantees on PCs and Structured Securities
we also provide long-term standby commitments to certain
customers, which obligate us to purchase delinquent loans that
are covered by those agreements. Most of the guarantees we
provide meet the definition of a derivative under SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities, or SFAS 133; however, most of
these guarantees also qualify for a scope exemption for
financial guarantee contracts in SFAS 133. For guarantees
that meet the scope exemption, we initially account for the
guarantee obligation at fair value and subsequently amortize the
obligation into earnings. If we determine that our guarantee
does not qualify for the scope exemption, we account for it as a
derivative with changes in fair value reflected in current
period earnings.
At June 30, 2008 and December 31, 2007, we had
$1,823.8 billion and $1,738.8 billion of issued PCs
and Structured Securities and such other mortgage guarantees,
respectively, of which $413.9 billion and
$357.0 billion were held in our retained portfolio. When we
purchase Freddie Mac PCs or Structured Securities for our
retained portfolio, we do not derecognize any components of the
guarantee asset, guarantee obligation, reserve for guarantee
losses, or any other outstanding recorded amounts associated
with the guarantee transaction because our contractual guarantee
obligation to the unconsolidated PC trust remains in force until
the trust is liquidated, unless the trust is consolidated.
Whether we own the security or not, our guarantee obligation and
related credit exposure do not change. Our valuation of these
securities is
consistent with the legal structure of the guarantee
transaction, which includes the Freddie Mac guarantee to the
securitization trust. Upon subsequent sale of a Freddie Mac PC
or Structured Security, we continue to account for any
outstanding recorded amounts associated with the guarantee
transaction on the same basis as prior to the sale of the
Freddie Mac PC or Structured Security, because the sale does not
result in the retention of any new assets or the assumption of
any new liabilities.
There were $1,639.7 billion and $1,518.8 billion at
June 30, 2008 and December 31, 2007, respectively, of
Structured Securities backed by resecuritized PCs and other
previously issued Structured Securities. These restructured
securities do not increase our credit-related exposure and
consist of single-class and multi-class Structured
Securities backed by PCs, Real Estate Mortgage Investment
Conduits, or REMICs, interest-only strips, and principal-only
strips.
Our guarantee obligation represents the recognized liability
associated with our guarantee of PCs and Structured Securities
net of cumulative amortization. Upon adoption of SFAS 157
on January 1, 2008, we began measuring the fair value of
our newly-issued guarantee obligations at their inception using
the practical expedient provided by FIN 45, as amended by
SFAS 157. Using the practical expedient, the initial
guarantee obligation is recorded at an amount equal to the fair
value of compensation received in the related securitization
transaction. As a result, we no longer record estimates of
deferred gains or immediate, day one, losses on most
guarantees. However, all unamortized amounts recorded prior to
January 1, 2008 will continue to be deferred and amortized
using existing amortization methods. Valuation of the guarantee
obligation subsequent to initial recognition will use current
pricing assumptions and related inputs. For additional
information regarding our fair value methods and assumptions
related to our guarantee obligation, see NOTE 14:
FAIR VALUE DISCLOSURES. In addition to our guarantee
obligation, we recognized a reserve for guarantee losses on PCs
that totaled $5.3 billion and $2.6 billion at
June 30, 2008 and December 31, 2007, respectively.
Derivative
Instruments
Derivative instruments include written options, written
swaptions, interest-rate swap guarantees and guarantees of
stated-final-maturity Structured Securities. Derivative
instruments also include short-term default guarantee
commitments that we account for as credit derivatives.
Servicing-Related
Premium Guarantees
We provide guarantees to reimburse servicers for premiums paid
to acquire servicing in situations where the original seller is
unable to perform under its separate servicing agreement. The
liability associated with these agreements was not material at
June 30, 2008 and December 30, 2007.
Table 2.1 below presents our maximum potential amount of
future payments, our recognized liability and the maximum
remaining term of these guarantees.
Table
2.1 Financial Guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
Maximum
|
|
|
Recognized
|
|
|
Remaining
|
|
|
Maximum
|
|
|
Recognized
|
|
|
Remaining
|
|
|
|
Exposure
|
|
|
Liability
|
|
|
Term
|
|
|
Exposure
|
|
|
Liability
|
|
|
Term
|
|
|
|
(dollars in millions, terms in years)
|
|
|
Guaranteed PCs, Structured Securities and other mortgage
guarantees
issued(1)
|
|
$
|
1,823,803
|
|
|
$
|
14,022
|
|
|
|
40
|
|
|
$
|
1,738,833
|
|
|
$
|
13,712
|
|
|
|
40
|
|
Derivative instruments
|
|
|
89,350
|
|
|
|
738
|
|
|
|
27
|
|
|
|
32,538
|
|
|
|
129
|
|
|
|
30
|
|
Servicing-related premium guarantees
|
|
|
55
|
|
|
|
|
|
|
|
5
|
|
|
|
37
|
|
|
|
|
|
|
|
5
|
|
|
|
(1)
|
Exclude mortgage loans and
mortgage-related securities traded, but not yet settled.
|
With the exception of interest-rate swap guarantees included in
derivative instruments in Table 2.1, maximum exposure
represents the contractual amounts that could be lost under the
guarantees if underlying borrowers defaulted, without
consideration of possible recoveries under recourse provisions
or from collateral held or pledged. The maximum exposure related
to interest-rate swap guarantees is based on contractual rates
and without consideration of recovery under recourse provisions.
The maximum exposure disclosed above is not representative of
the actual loss we are likely to incur, based on our historical
loss experience and after consideration of proceeds from related
collateral liquidation.
Other
Financial Commitments
As part of the guarantee arrangements pertaining to multifamily
housing revenue bonds, we provided commitments to advance funds,
commonly referred to as liquidity guarantees,
totaling $11.2 billion and $8.0 billion at
June 30, 2008 and December 31, 2007, respectively.
These guarantees enable the repurchase of any tendered
tax-exempt and related taxable pass-through certificates and
housing revenue bonds that are unable to be remarketed. Any
repurchased securities would be pledged to us to secure funding
until the time when the securities could be remarketed.
Gains
and Losses on Transfers of PCs and Structured Securities that
are Accounted for as Sales
We recognized gains (losses) on transfers of PCs and Structured
Securities that were accounted for as sales under SFAS 140.
For the three months ended June 30, 2008 and 2007, the net
pre-tax gains (losses) were approximately $1 million and
$(119) million, respectively. For the six months ended
June 30, 2008 and 2007, the net pre-tax gains (losses) were
approximately $92 million and $(99) million,
respectively.
Valuation
of Recognized Guarantee Asset
Guarantee
Asset
Our approach for estimating the fair value of the guarantee
asset at June 30, 2008 used third-party market data as
practicable. For approximately 75% of the fair value of the
guarantee asset, which relates to fixed-rate loan products that
reflect current market rates, the valuation approach involved
obtaining dealer quotes on proxy securities with collateral
similar to aggregated characteristics of our portfolio. This
effectively equates the guarantee asset with current, or
spot, market values for excess servicing
interest-only securities. We consider these securities to be
comparable to the guarantee asset, in that they represent
interest-only cash flows, and do not have matching
principal-only securities. The remaining 25% of the fair value
of the guarantee asset related to underlying loan products for
which comparable market prices were not readily available. These
amounts relate specifically to ARM products, highly seasoned
loans or fixed-rate loans with coupons that are not consistent
with current market rates. This portion of the guarantee asset
was valued using an expected cash flow approach including only
those cash flows expected to result from our contractual right
to receive management and guarantee fees, with market input
assumptions extracted from the dealer quotes provided on the
more liquid products, reduced by an estimated liquidity
discount. We establish some of our guarantee asset in accordance
with SFAS 140 in transactions through various underwriters
in which we issue our PCs and Structured Securities for cash.
However, we issue most of our PCs and Structured Securities in
guarantor swap transactions in which securities dealers or
investors deliver to us the mortgage-related assets underlying
the securities in exchange for the securities themselves. We
establish the majority of our guarantee asset in these guarantor
swap transactions in accordance with FIN 45. The key
assumptions used in valuation of our guarantee asset and a
sensitivity analysis for our guarantee asset, which includes
those guarantee assets established in swap transactions as well
as those established in cash sales, are presented below.
Key
Assumptions Used in the Valuation of the Guarantee
Asset
Table 2.2 summarizes the key assumptions associated with the
fair value measurements of the recognized guarantee asset. The
fair values at the time of securitization and the subsequent
fair value measurements were estimated using third-party
information. However, the assumptions included in this table for
those periods are those implied by our fair value estimates,
with the internal rates of return, or IRRs, adjusted where
necessary to align our internal models with estimated fair
values determined using third-party information. Prepayment
rates are presented as implied by our internal models and have
not been similarly adjusted.
At June 30, 2008, our guarantee asset totaled
$11.0 billion on our consolidated balance sheets, of which
approximately $0.2 billion, or approximately 2%, related to
PCs and Structured Securities backed by multifamily mortgage
loans. Table 2.2 contains the key assumptions used to
derive the fair value measurement of the entire guarantee asset
associated with PCs and other financial guarantees backed by
single-family mortgage loans. For the portion of our guarantee
asset that is valued by obtaining dealer quotes on proxy
securities, we derive the assumptions from the prices we are
provided. Table 2.3 contains a sensitivity analysis of the
fair value of the entire guarantee asset associated with PCs and
other financial guarantees backed by single-family mortgage
loans.
Table 2.2
Key Assumptions Utilized in Fair Value Measurements of the
Guarantee Asset (Single-Family Mortgages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
Mean Valuation
Assumptions(1)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
IRRs(2)
|
|
|
9.5
|
%
|
|
|
6.4
|
%
|
|
|
9.5
|
%
|
|
|
6.7
|
%
|
Prepayment
rates(3)
|
|
|
13.0
|
%
|
|
|
17.3
|
%
|
|
|
15.4
|
%
|
|
|
17.7
|
%
|
Weighted average lives (years)
|
|
|
6.0
|
|
|
|
5.3
|
|
|
|
5.4
|
|
|
|
5.1
|
|
|
|
(1)
|
Mean values represent the weighted
average of all estimated IRRs, prepayment rate and weighted
average lives assumptions.
|
(2)
|
IRR assumptions represent an unpaid
principal balance weighted average of the discount rates
inherent in the fair value of the recognized guarantee asset. We
estimated the IRRs using a model which employs multiple interest
rate scenarios versus a single assumption.
|
(3)
|
Although prepayment rates are
simulated monthly, the assumptions above represent annualized
prepayment rates based on unpaid principal balances.
|
Table 2.3
Sensitivity Analysis of the Guarantee Asset (Single-Family
Mortgages)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
(dollars in millions)
|
|
Fair value
|
|
$
|
10,828
|
|
|
$
|
9,417
|
|
Weighted average IRR assumptions
|
|
|
9.6
|
%
|
|
|
8.1
|
%
|
Impact on fair value of 100 bps unfavorable change
|
|
$
|
(393
|
)
|
|
$
|
(389
|
)
|
Impact on fair value of 200 bps unfavorable change
|
|
$
|
(760
|
)
|
|
$
|
(746
|
)
|
Weighted average prepayment rate assumptions
|
|
|
11.5
|
%
|
|
|
16.5
|
%
|
Impact on fair value of 10% unfavorable change
|
|
$
|
(489
|
)
|
|
$
|
(516
|
)
|
Impact on fair value of 20% unfavorable change
|
|
$
|
(929
|
)
|
|
$
|
(977
|
)
|
Valuation
of Other Retained Interests
Other retained interests include securities we issued as part of
a resecuritization transaction, which was recorded as a sale.
The majority of these securities are classified as
available-for-sale. The fair value of other retained interests
is generally based on independent price quotations obtained from
third-party pricing services or dealer provided prices.
To report the hypothetical sensitivity of the carrying value of
other retained interests, we used internal models adjusted where
necessary to align with the fair values. The sensitivity
analysis in Table 2.4 illustrates hypothetical adverse
changes in the fair value of other retained interests for
changes in key assumptions based on these models.
Table
2.4 Sensitivity Analysis of Other Retained
Interests(1)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
(dollars in millions)
|
|
Fair value
|
|
$
|
101,130
|
|
|
$
|
107,931
|
|
Weighted average IRR assumptions
|
|
|
5.6
|
%
|
|
|
5.5
|
%
|
Impact on fair value of 100 bps unfavorable change
|
|
$
|
(4,178
|
)
|
|
$
|
(4,109
|
)
|
Impact on fair value of 200 bps unfavorable change
|
|
$
|
(8,054
|
)
|
|
$
|
(7,928
|
)
|
Weighted average prepayment rate assumptions
|
|
|
7.8
|
%
|
|
|
8.7
|
%
|
Impact on fair value of 10% unfavorable change
|
|
$
|
(53
|
)
|
|
$
|
(30
|
)
|
Impact on fair value of 20% unfavorable change
|
|
$
|
(107
|
)
|
|
$
|
(57
|
)
|
|
|
(1)
|
The sensitivity analysis includes
only other retained interests whose fair value is impacted as a
result of changes in IRR and prepayment assumptions.
|
Cash
Flows on Transfers of Securitized Interests and Corresponding
Retained Interests
Table 2.5 summarizes cash flows on retained interests as
well as the amount of cash payments made to acquire delinquent
loans to satisfy our financial performance obligations.
Table
2.5 Details of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
Cash flows from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers of Freddie Mac securities that were accounted for as
sales(1)
|
|
$
|
14,424
|
|
|
$
|
27,024
|
|
|
$
|
24,732
|
|
|
$
|
39,042
|
|
Cash flows received on the guarantee
asset(2)
|
|
|
720
|
|
|
|
553
|
|
|
|
1,409
|
|
|
|
1,076
|
|
Other retained interests principal and
interest(3)
|
|
|
5,628
|
|
|
|
6,274
|
|
|
|
10,866
|
|
|
|
12,470
|
|
Purchases of delinquent or foreclosed
loans(4)
|
|
|
(2,007
|
)
|
|
|
(1,768
|
)
|
|
|
(2,783
|
)
|
|
|
(3,469
|
)
|
|
|
(1)
|
Represents proceeds from securities
receiving sales treatment under SFAS 140 including sales of
Structured Securities. On our consolidated statements of cash
flows, this amount is included in the investing activities as
part of proceeds from sales of trading and available-for-sale
securities.
|
(2)
|
Represents cash received related to
management and guarantee fees, which reduce the guarantee asset.
On our consolidated statements of cash flows, the change in
guarantee asset and the corresponding management and guarantee
fee income are reflected as operating activities.
|
(3)
|
Represents cash proceeds related to
interest income and principal repayment of PCs or Structured
Securities that are not transferred to third parties upon the
completion of a securitization or resecuritization transaction.
On our consolidated statements of cash flows, the cash flows
from interest are included in net income (loss) and the
principal repayments are included in the investing activities as
part of proceeds from maturities of available-for-sale
securities. The amount for the three and six months ended
June 30, 2007 has been revised to also include
interest-only and principal-only strips, which conforms to the
2008 presentation.
|
(4)
|
Represents our cash payments for
the purchase of delinquent or foreclosed loans from mortgage
pools underlying our PCs and Structured Securities. On our
consolidated statements of cash flows, this amount is included
in the investing activities as part of purchases of
held-for-investment mortgages.
|
Credit
Protection and Other Forms of Recourse
In connection with our guarantees of PCs and Structured
Securities issued, we have credit protection in the form of
primary mortgage insurance, pool insurance, recourse to lenders,
and other forms of credit enhancements. At June 30, 2008
and December 31, 2007, we recorded $1.3 billion and
$0.7 billion, respectively, within other assets on our
consolidated balance sheets related to these credit enhancements
on securitized mortgages. Table 2.6 presents the maximum
amounts of potential loss recovery by type of credit protection.
Table 2.6
Credit Protection and Other Forms of
Recourse(1)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
(in millions)
|
|
PCs and Structured Securities:
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
Primary mortgage insurance
|
|
$
|
58,503
|
|
|
$
|
51,897
|
|
Lender recourse and indemnifications
|
|
|
11,687
|
|
|
|
12,085
|
|
Pool insurance
|
|
|
3,832
|
|
|
|
3,813
|
|
Other credit enhancements
|
|
|
497
|
|
|
|
549
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Credit enhancements
|
|
|
2,720
|
|
|
|
1,233
|
|
Structured Securities backed by Ginnie Mae
Certificates(2)
|
|
|
1,150
|
|
|
|
1,268
|
|
|
|
(1)
|
Exclude credit enhancements related
to Structured Transactions, which had unpaid principal balances
that totaled $26.3 billion and $20.2 billion at
June 30, 2008 and December 31, 2007, respectively.
|
(2)
|
Ginnie Mae Certificates are backed
by the full faith and credit of the U.S. government.
|
In addition to the types of credit enhancements associated with
our PCs and Structured Securities, certain of our Structured
Transactions benefit from additional credit protection afforded
by subordinated security structures. Our Structured Transactions
also include $2.0 billion at June 30, 2008 of
securitized FHA/VA loans, for which those agencies provide
recourse for 100% of qualifying losses associated with the loan.
There are $5.6 billion in unpaid principal balance of these
securities at June 30, 2008, which had coverage, including
amounts associated with subordination, of up to approximately
19% of the security balance, on average. The remaining
Structured Transactions, which do not have subordination
protection or other forms of credit enhancement, totaled
$18.7 billion at June 30, 2008. Although our
charge-offs associated with Structured Transactions to date have
been minimal, we have increased our provision for credit losses
associated with the loans underlying these guarantees during the
three and six months ended June 30, 2008.
Indemnifications
In connection with certain business transactions, we may provide
indemnification to counterparties for claims arising out of
breaches of certain obligations (e.g., those arising from
representations and warranties) in contracts entered into in the
normal course of business. For a discussion of these
indemnifications see ITEM 13. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING
NOTES NOTE 2: FINANCIAL GUARANTEES AND
TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS in our Registration Statement. Our assessment is
that the risk of any material loss from such a claim for
indemnification is remote and there are no probable and
estimable losses associated with these contracts. Therefore, we
have not recorded any liabilities related to these
indemnifications on our consolidated balance sheets at
June 30, 2008 and December 31, 2007.
NOTE 3:
VARIABLE INTEREST ENTITIES
We are a party to numerous entities that are considered to be
VIEs. Our investments in VIEs include low-income housing tax
credit, or LIHTC, partnerships and certain Structured Securities
transactions. In addition, we buy the highly-rated senior
securities in non-mortgage-related, asset-backed investment
trusts that are VIEs. Our investments in these securities do not
represent a significant variable interest in the securitization
trusts as the securities issued by these trusts are not designed
to absorb a significant portion of the variability in the trust.
Accordingly, we do not consolidate these securities. See
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Consolidation and
Equity Method of Accounting in our Registration Statement
for further information regarding the consolidation practices of
our VIEs.
LIHTC
Partnerships
We invest as a limited partner in LIHTC partnerships formed for
the purpose of providing funding for affordable multifamily
rental properties. The LIHTC partnerships invest as limited
partners in lower-tier partnerships, which own and operate
multifamily rental properties. These properties are rented to
qualified low-income tenants, allowing the properties to be
eligible for federal tax credits. Most of these LIHTC
partnerships are VIEs. A general partner operates the
partnership, identifying investments and obtaining debt
financing as needed to finance partnership activities. Although
these partnerships generate operating losses, we realize a
return on our investment through reductions in income tax
expense that result from tax credits and the deductibility of
the operating losses of these partnerships. The partnership
agreements are typically structured to meet a required
15-year
period of occupancy by qualified low-income tenants. The
investments in LIHTC partnerships, in which we were either the
primary beneficiary or had a significant variable interest, were
made between 1989 and 2007. At June 30, 2008 and
December 31, 2007, we did not guarantee any obligations of
these LIHTC partnerships and our exposure was limited to the
amount of our investment. At June 30, 2008 and
December 31, 2007, we were the primary beneficiary of
investments in six partnerships and we consolidated these
investments. The investors in the obligations of the
consolidated LIHTC partnerships have recourse only to the assets
of those VIEs and do not have recourse to us.
VIEs Not
Consolidated
LIHTC
Partnerships
At both June 30, 2008 and December 31, 2007, we had
unconsolidated investments in 189 LIHTC partnerships,
respectively, in which we had a significant variable interest.
The size of these partnerships at June 30, 2008 and
December 31, 2007, as measured in total assets, was
$10.4 billion and $10.3 billion, respectively. These
partnerships are accounted for using the equity method. As a
limited partner, our maximum exposure to loss equals the
undiscounted book value of our equity investment. At
June 30, 2008 and December 31, 2007, our maximum
exposure to loss on unconsolidated LIHTC partnerships, in which
we had a significant variable interest, was $3.5 billion
and $3.7 billion, respectively.
Structured
Transactions
We periodically issue securities in Structured Transactions,
which are backed by mortgage loans or non-Freddie Mac
mortgage-related securities using collateral pools transferred
to a trust specifically created for the purpose of issuing
securities. These trusts issue various senior interests and
subordinated interests. We purchase interests, including senior
interests, of the trusts and issue and guarantee Structured
Securities backed by these interests. The subordinated interests
are generally either held by the seller or other party or sold
in the capital markets. Generally, the structure of the
transactions and the trusts as qualifying special purpose
entities exempts them from the scope of FIN 46(R). However,
at June 30, 2008 and December 31, 2007, we had an
interest in one Structured Transaction that did not fall within
the scope of this exception and in which we had a significant
variable interest. Our involvement in this one Structured
Transaction began in 2002. The size of the Structured
Transaction at June 30, 2008 and December 31, 2007 as
measured in total assets, was $39 million and
$40 million, respectively. For the same dates, our maximum
exposure to loss on this transaction was $35 million and
$37 million, respectively, consisting of the book value of
our investments plus incremental guarantees of the senior
interests that are held by third parties.
NOTE 4:
RETAINED PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO
Table 4.1 summarizes amortized cost, estimated fair values
and corresponding gross unrealized gains and gross unrealized
losses for available-for-sale securities by major security type.
Table 4.1
Available-For-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(in millions)
|
|
|
June 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
287,354
|
|
|
$
|
1,855
|
|
|
$
|
(3,731
|
)
|
|
$
|
285,478
|
|
Subprime
|
|
|
85,061
|
|
|
|
|
|
|
|
(14,597
|
)
|
|
|
70,464
|
|
Commercial mortgage-backed securities
|
|
|
64,874
|
|
|
|
28
|
|
|
|
(3,565
|
)
|
|
|
61,337
|
|
Alt-A and other
|
|
|
47,348
|
|
|
|
8
|
|
|
|
(11,261
|
)
|
|
|
36,095
|
|
Federal National Mortgage Association, or Fannie Mae.
|
|
|
44,647
|
|
|
|
375
|
|
|
|
(348
|
)
|
|
|
44,674
|
|
Obligations of state and political subdivisions
|
|
|
13,320
|
|
|
|
43
|
|
|
|
(776
|
)
|
|
|
12,587
|
|
Manufactured housing
|
|
|
1,070
|
|
|
|
100
|
|
|
|
(48
|
)
|
|
|
1,122
|
|
Ginnie Mae
|
|
|
422
|
|
|
|
19
|
|
|
|
(1
|
)
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
544,096
|
|
|
|
2,428
|
|
|
|
(34,327
|
)
|
|
|
512,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
12,845
|
|
|
|
24
|
|
|
|
|
|
|
|
12,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities
|
|
|
12,845
|
|
|
|
24
|
|
|
|
|
|
|
|
12,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
556,941
|
|
|
$
|
2,452
|
|
|
$
|
(34,327
|
)
|
|
$
|
525,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
346,569
|
|
|
$
|
2,981
|
|
|
$
|
(2,583
|
)
|
|
$
|
346,967
|
|
Subprime
|
|
|
101,278
|
|
|
|
12
|
|
|
|
(8,584
|
)
|
|
|
92,706
|
|
Commercial mortgage-backed securities
|
|
|
64,965
|
|
|
|
515
|
|
|
|
(681
|
)
|
|
|
64,799
|
|
Alt-A and other
|
|
|
51,456
|
|
|
|
15
|
|
|
|
(2,543
|
)
|
|
|
48,928
|
|
Fannie Mae
|
|
|
45,688
|
|
|
|
513
|
|
|
|
(344
|
)
|
|
|
45,857
|
|
Obligations of state and political subdivisions
|
|
|
14,783
|
|
|
|
146
|
|
|
|
(351
|
)
|
|
|
14,578
|
|
Manufactured housing
|
|
|
1,149
|
|
|
|
131
|
|
|
|
(12
|
)
|
|
|
1,268
|
|
Ginnie Mae
|
|
|
545
|
|
|
|
19
|
|
|
|
(2
|
)
|
|
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
626,433
|
|
|
|
4,332
|
|
|
|
(15,100
|
)
|
|
|
615,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
16,644
|
|
|
|
25
|
|
|
|
(81
|
)
|
|
|
16,588
|
|
Commercial paper
|
|
|
18,513
|
|
|
|
|
|
|
|
|
|
|
|
18,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities
|
|
|
35,157
|
|
|
|
25
|
|
|
|
(81
|
)
|
|
|
35,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
661,590
|
|
|
$
|
4,357
|
|
|
$
|
(15,181
|
)
|
|
$
|
650,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 4.2 shows the fair value of available-for-sale securities
as of June 30, 2008 and December 31, 2007 that have
been in a gross unrealized loss position less than
12 months or greater than 12 months.
Table
4.2 Available-For-Sale Securities in a Gross
Unrealized Loss Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(in millions)
|
|
|
June 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
116,434
|
|
|
$
|
(1,916
|
)
|
|
$
|
41,237
|
|
|
$
|
(1,815
|
)
|
|
$
|
157,671
|
|
|
$
|
(3,731
|
)
|
Subprime
|
|
|
41,427
|
|
|
|
(8,047
|
)
|
|
|
28,350
|
|
|
|
(6,550
|
)
|
|
|
69,777
|
|
|
|
(14,597
|
)
|
Commercial mortgage-backed securities
|
|
|
32,901
|
|
|
|
(1,939
|
)
|
|
|
27,237
|
|
|
|
(1,626
|
)
|
|
|
60,138
|
|
|
|
(3,565
|
)
|
Alt-A and other
|
|
|
18,449
|
|
|
|
(6,728
|
)
|
|
|
16,765
|
|
|
|
(4,533
|
)
|
|
|
35,214
|
|
|
|
(11,261
|
)
|
Fannie Mae
|
|
|
11,247
|
|
|
|
(85
|
)
|
|
|
7,545
|
|
|
|
(263
|
)
|
|
|
18,792
|
|
|
|
(348
|
)
|
Obligations of state and political subdivisions
|
|
|
4,843
|
|
|
|
(224
|
)
|
|
|
5,081
|
|
|
|
(552
|
)
|
|
|
9,924
|
|
|
|
(776
|
)
|
Manufactured housing
|
|
|
393
|
|
|
|
(38
|
)
|
|
|
38
|
|
|
|
(10
|
)
|
|
|
431
|
|
|
|
(48
|
)
|
Ginnie Mae
|
|
|
35
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
|
|
|
|
37
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
225,729
|
|
|
|
(18,978
|
)
|
|
|
126,255
|
|
|
|
(15,349
|
)
|
|
|
351,984
|
|
|
|
(34,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities in a gross unrealized loss
position
|
|
$
|
225,729
|
|
|
$
|
(18,978
|
)
|
|
$
|
126,255
|
|
|
$
|
(15,349
|
)
|
|
$
|
351,984
|
|
|
$
|
(34,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
22,546
|
|
|
$
|
(254
|
)
|
|
$
|
135,966
|
|
|
$
|
(2,329
|
)
|
|
$
|
158,512
|
|
|
$
|
(2,583
|
)
|
Subprime
|
|
|
87,004
|
|
|
|
(8,021
|
)
|
|
|
5,213
|
|
|
|
(563
|
)
|
|
|
92,217
|
|
|
|
(8,584
|
)
|
Commercial mortgage-backed securities
|
|
|
8,652
|
|
|
|
(154
|
)
|
|
|
26,207
|
|
|
|
(527
|
)
|
|
|
34,859
|
|
|
|
(681
|
)
|
Alt-A and other
|
|
|
33,509
|
|
|
|
(2,029
|
)
|
|
|
14,525
|
|
|
|
(514
|
)
|
|
|
48,034
|
|
|
|
(2,543
|
)
|
Fannie Mae
|
|
|
4,728
|
|
|
|
(17
|
)
|
|
|
15,214
|
|
|
|
(327
|
)
|
|
|
19,942
|
|
|
|
(344
|
)
|
Obligations of state and political subdivisions
|
|
|
7,735
|
|
|
|
(264
|
)
|
|
|
1,286
|
|
|
|
(87
|
)
|
|
|
9,021
|
|
|
|
(351
|
)
|
Manufactured housing
|
|
|
435
|
|
|
|
(11
|
)
|
|
|
24
|
|
|
|
(1
|
)
|
|
|
459
|
|
|
|
(12
|
)
|
Ginnie Mae
|
|
|
2
|
|
|
|
|
|
|
|
74
|
|
|
|
(2
|
)
|
|
|
76
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
164,611
|
|
|
|
(10,750
|
)
|
|
|
198,509
|
|
|
|
(4,350
|
)
|
|
|
363,120
|
|
|
|
(15,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
8,236
|
|
|
|
(63
|
)
|
|
|
3,222
|
|
|
|
(18
|
)
|
|
|
11,458
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities
|
|
|
8,236
|
|
|
|
(63
|
)
|
|
|
3,222
|
|
|
|
(18
|
)
|
|
|
11,458
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities in a gross unrealized loss
position
|
|
$
|
172,847
|
|
|
$
|
(10,813
|
)
|
|
$
|
201,731
|
|
|
$
|
(4,368
|
)
|
|
$
|
374,578
|
|
|
$
|
(15,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008, our gross unrealized losses on
available-for-sale mortgage-related securities were
$34.3 billion. Included in these losses are gross
unrealized losses of $29.4 billion related to non-agency
mortgage-related securities backed by subprime, Alt-A and other
loans and commercial mortgage-backed securities. Approximately
95% of our non-agency mortgage-related securities backed by
subprime, Alt-A and other loans and commercial mortgage-backed
securities were investment grade (i.e., rated BBB−
or better on a Standard & Poors or equivalent
scale) at July 28, 2008. We believe that these unrealized
losses on non-agency mortgage-related securities as of
June 30, 2008, were principally a result of decreased
liquidity and larger risk premiums in the non-agency mortgage
market. Our review included cash flow analysis based on default
and prepayment assumptions. While it is possible that under
certain conditions, defaults and severity of losses on these
securities could exceed our subordination and credit enhancement
levels and a principal and interest loss could occur, we do not
believe that those conditions are probable at June 30,
2008. As a result of our reviews, we have not identified any
securities in our available-for-sale portfolio that are probable
of incurring a contractual principal or interest loss beyond the
securities for which impairment has already been recorded at
June 30, 2008. Based on our ability and intent to hold our
available-for-sale securities for a sufficient time to recover
all unrealized losses and our consideration of all available
information, we have concluded that, other than the securities
for which impairment has already been recorded, the reduction in
fair value of these securities is temporary at June 30,
2008.
Table 4.3 below illustrates the gross realized gains and
gross realized losses from the sale of available-for-sale
securities.
Table
4.3 Gross Realized Gains and Gross Realized Losses
on
Available-For-Sale
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
41
|
|
|
$
|
|
|
|
$
|
67
|
|
|
$
|
|
|
Freddie Mac
|
|
|
1
|
|
|
|
70
|
|
|
|
192
|
|
|
|
112
|
|
Fannie Mae
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities gross realized gains
|
|
|
42
|
|
|
|
70
|
|
|
|
268
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities gross realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
42
|
|
|
|
70
|
|
|
|
268
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
Freddie Mac
|
|
|
(4
|
)
|
|
|
(306
|
)
|
|
|
(11
|
)
|
|
|
(317
|
)
|
Fannie Mae
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities gross realized losses
|
|
|
(4
|
)
|
|
|
(315
|
)
|
|
|
(15
|
)
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities gross realized losses
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized losses
|
|
|
(4
|
)
|
|
|
(319
|
)
|
|
|
(15
|
)
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
$
|
38
|
|
|
$
|
(249
|
)
|
|
$
|
253
|
|
|
$
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the gross realized gains and gross realized
losses included in Table 4.3 above, we recorded security
impairments on available-for-sale securities for the three
months ended June 30, 2008 and 2007, of $1.0 billion
and $294 million, respectively. For the six months ended
June 30, 2008 and 2007, we recorded security impairments on
available-for-sale securities of $1.1 billion and
$350 million, respectively.
Table 4.4 presents the changes in AOCI, net of taxes,
related to available-for-sale securities. The net unrealized
holding (losses), net of tax, represents the net fair value
adjustments recorded on available-for-sale securities throughout
the period, after the effects of our federal statutory tax rate
of 35%. The net reclassification adjustment for realized losses,
net of tax, represents the amount of those fair value
adjustments, after the effects of our federal statutory tax rate
of 35%, that have been recognized in earnings due to the sale of
an
available-for-sale
security or the recognition of an impairment loss.
Table
4.4 AOCI, Net of Taxes, Related to
Available-For-Sale
Securities
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
(7,040
|
)
|
|
$
|
(3,332
|
)
|
Adjustment to initially apply
SFAS 159(1)
|
|
|
(854
|
)
|
|
|
|
|
Net unrealized holding (losses), net of
tax(2)
|
|
|
(13,383
|
)
|
|
|
(3,423
|
)
|
Net reclassification adjustment for realized losses, net of
tax(3)(4)
|
|
|
558
|
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(20,719
|
)
|
|
$
|
(6,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of tax benefit of
$460 million for the six months ended June 30, 2008.
|
(2)
|
Net of tax benefit of
$7.2 billion and $1.8 billion for the six months ended
June 30, 2008 and 2007, respectively.
|
(3)
|
Net of tax benefit of
$301 million and $197 million for the six months ended
June 30, 2008 and 2007, respectively.
|
(4)
|
Includes the reversal of previously
recorded unrealized losses that have been recognized on our
consolidated statement of income as impairment losses on
available-for-sale securities of $722 million and
$225 million, net of tax, for the six months ended
June 30, 2008 and 2007, respectively.
|
Table 4.5 summarizes the estimated fair values by major
security type for trading securities held in our retained
portfolio.
Table
4.5 Trading Securities in our Retained
Portfolio
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
Mortgage-related securities issued by:
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
129,844
|
|
|
$
|
12,216
|
|
Fannie Mae
|
|
|
29,490
|
|
|
|
1,697
|
|
Ginnie Mae
|
|
|
201
|
|
|
|
175
|
|
Other
|
|
|
59
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total trading securities in our retained portfolio
|
|
$
|
159,594
|
|
|
$
|
14,089
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2008 and 2007, we
recorded net unrealized gains (losses) on trading securities
held at June 30, 2008 and 2007 of $(2.1) billion and
$20 million, respectively. For the six months ended
June 30, 2008 and 2007, we recorded net unrealized gains
(losses) on trading securities held at June 30, 2008 and
2007 of $(1.2) billion and $45 million, respectively.
Total trading securities in our retained portfolio include
$3.9 billion and $4.2 billion of
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments and amendment of FASB Statement
No. 133 and 140, or SFAS 155, related assets
as of June 30, 2008 and December 31, 2007,
respectively. Gains (losses) on trading securities include
losses of $(383) million and $(24) million,
respectively, related to these SFAS 155 trading securities
for the three and six months ended June 30, 2008. Gains
(losses) on trading securities include losses of
$(99) million related to these SFAS 155 trading
securities for both the three and six months ended June 30,
2007.
Retained
Portfolio Voluntary Growth Limit
As of March 1, 2008, we are no longer subject to the
voluntary growth limit on our retained portfolio of 2% annually.
Collateral
Pledged
Collateral
Pledged to Freddie Mac
Our counterparties are required to pledge collateral for reverse
repurchase transactions and most interest-rate swap transactions
subject to collateral posting thresholds generally related to a
counterpartys credit rating. Although it is our practice
not to repledge assets held as collateral, a portion of the
collateral may be repledged based on master agreements related
to our interest-rate swap transactions. At June 30, 2008
and December 31, 2007, we did not have collateral in the
form of securities pledged to and held by us under interest-rate
swap agreements.
Collateral
Pledged by Freddie Mac
We are also required to pledge collateral for margin
requirements with third-party custodians in connection with
secured financings, interest-rate swap agreements, futures and
daily trade activities with some counterparties. The level of
collateral pledged related to our interest-rate swap agreements
is determined after giving consideration to our credit rating.
As of June 30, 2008, we had two uncommitted intraday lines
of credit with third parties, both of which are secured, in
connection with the Federal Reserve Boards revised
payments system risk policy, which restricts or eliminates
daylight overdrafts by the GSEs in connection with our use of
the Fedwire system. In certain limited circumstances, the line
of credit agreements give the secured parties the right to
repledge the securities underlying our financing to other third
parties, including the Federal Reserve Bank. We pledge
collateral to meet these requirements upon a demand by the
respective counterparty.
Table 4.6 summarizes all securities pledged as collateral
by us, including assets that the secured party may repledge and
those that may not be repledged.
Table 4.6
Collateral in the Form of Securities Pledged
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
Securities pledged with ability for secured party to repledge
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
$
|
21,896
|
|
|
$
|
17,010
|
|
Securities pledged without ability for secured party to repledge
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
452
|
|
|
|
793
|
|
|
|
|
|
|
|
|
|
|
Total securities pledged
|
|
$
|
22,348
|
|
|
$
|
17,803
|
|
|
|
|
|
|
|
|
|
|
NOTE 5:
MORTGAGE LOANS AND LOAN LOSS RESERVES
We own both single-family mortgage loans, which are secured by
one-to-four family residential properties, and multifamily
mortgage loans, which are secured by properties with five or
more residential rental units.
Table 5.1 summarizes the types of loans within our retained
mortgage loan portfolio at June 30, 2008 and
December 31, 2007. These balances do not include mortgage
loans underlying our guaranteed PCs and Structured Securities,
since these are not consolidated on our balance sheets. See
NOTE 2: FINANCIAL GUARANTEES AND SECURITIZED
INTERESTS IN MORTGAGE-RELATED ASSETS for information on
our securitized mortgage loans.
Table
5.1 Mortgage Loans within the Retained
Portfolio
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
Single-family(1):
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$
|
24,000
|
|
|
$
|
20,707
|
|
Adjustable-rate
|
|
|
1,942
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
Total conventional
|
|
|
25,942
|
|
|
|
23,407
|
|
FHA/VA Fixed-rate
|
|
|
397
|
|
|
|
311
|
|
Rural Housing Service and other federally guaranteed loans
|
|
|
856
|
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
27,195
|
|
|
|
24,589
|
|
|
|
|
|
|
|
|
|
|
Multifamily(1):
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
59,740
|
|
|
|
53,111
|
|
Adjustable-rate
|
|
|
4,085
|
|
|
|
4,455
|
|
|
|
|
|
|
|
|
|
|
Total conventional
|
|
|
63,825
|
|
|
|
57,566
|
|
Rural Housing Service
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
63,828
|
|
|
|
57,569
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of mortgage loans
|
|
|
91,023
|
|
|
|
82,158
|
|
|
|
|
|
|
|
|
|
|
Deferred fees, unamortized premiums, discounts and other cost
basis adjustments
|
|
|
(1,462
|
)
|
|
|
(1,868
|
)
|
Lower of cost or market adjustments on loans
held-for-sale
|
|
|
(24
|
)
|
|
|
(2
|
)
|
Allowance for loan losses on loans
held-for-investment
|
|
|
(468
|
)
|
|
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage loans, net of allowance for loan losses
|
|
$
|
89,069
|
|
|
$
|
80,032
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on unpaid principal balances
and excluding mortgage loans traded, but not yet settled.
|
For the six months ended June 30, 2008 and 2007, we
transferred $ million and $40 million,
respectively, of
held-for-sale
mortgage loans to
held-for-investment.
Loan Loss
Reserves
We maintain an allowance for loan losses on mortgage loans in
our retained portfolio that we classify as held-for-investment
and a reserve for guarantee losses associated with mortgage
loans that underlie our guaranteed PCs and Structured
Securities, collectively referred to as loan loss reserves. For
loans subject to Statement of Position
No. 03-3,
Accounting for Certain Loans or Debt Securities
Acquired in a Transfer, or
SOP 03-3,
loan loss reserves are only established when it becomes probable
that we will be unable to collect all cash flows which we
expected to collect when we acquired the loan. Our allowance for
loan losses held-for-investment related to single-family and
multifamily mortgage loans was $402 million and
$66 million, respectively, as of June 30, 2008. The
amount of our total loan loss reserves that related to
single-family and multifamily mortgage loans was
$5.7 billion and $78 million, respectively, as of
June 30, 2008.
Table 5.2 summarizes loan loss reserve activity during the
periods presented.
Table
5.2 Detail of Loan Loss Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Allowance for
|
|
|
Reserve for
|
|
|
Total Loan
|
|
|
Allowance for
|
|
|
Reserve for
|
|
|
Total Loan
|
|
|
|
Loan Losses
|
|
|
Guarantee Losses
|
|
|
Loss Reserves
|
|
|
Loan Losses
|
|
|
Guarantee Losses
|
|
|
Loss Reserves
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
356
|
|
|
$
|
3,516
|
|
|
$
|
3,872
|
|
|
$
|
87
|
|
|
$
|
716
|
|
|
$
|
803
|
|
Provision for credit losses
|
|
|
159
|
|
|
|
2,378
|
|
|
|
2,537
|
|
|
|
67
|
|
|
|
380
|
|
|
|
447
|
|
Charge-offs(1)(2)
|
|
|
(116
|
)
|
|
|
(512
|
)
|
|
|
(628
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
(87
|
)
|
Recoveries(1)
|
|
|
69
|
|
|
|
108
|
|
|
|
177
|
|
|
|
51
|
|
|
|
|
|
|
|
51
|
|
Transfers,
net(3)
|
|
|
|
|
|
|
(145
|
)
|
|
|
(145
|
)
|
|
|
|
|
|
|
(76
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
468
|
|
|
$
|
5,345
|
|
|
$
|
5,813
|
|
|
$
|
118
|
|
|
$
|
1,020
|
|
|
$
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Allowance for
|
|
|
Reserve for
|
|
|
Total Loan
|
|
|
Allowance for
|
|
|
Reserve for
|
|
|
Total Loan
|
|
|
|
Loan Losses
|
|
|
Guarantee Losses
|
|
|
Loss Reserves
|
|
|
Loan Losses
|
|
|
Guarantee Losses
|
|
|
Loss Reserves
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
256
|
|
|
$
|
2,566
|
|
|
$
|
2,822
|
|
|
$
|
69
|
|
|
$
|
550
|
|
|
$
|
619
|
|
Provision for credit losses
|
|
|
295
|
|
|
|
3,482
|
|
|
|
3,777
|
|
|
|
115
|
|
|
|
580
|
|
|
|
695
|
|
Charge-offs(1)(2)
|
|
|
(239
|
)
|
|
|
(687
|
)
|
|
|
(926
|
)
|
|
|
(166
|
)
|
|
|
|
|
|
|
(166
|
)
|
Recoveries(1)
|
|
|
156
|
|
|
|
156
|
|
|
|
312
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
Transfers,
net(3)
|
|
|
|
|
|
|
(172
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
(110
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
468
|
|
|
$
|
5,345
|
|
|
$
|
5,813
|
|
|
$
|
118
|
|
|
$
|
1,020
|
|
|
$
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Charge-offs related to retained mortgages represent the amount
of the unpaid principal balance of a loan that has been
discharged using the reserve balance to remove the loan from our
retained portfolio at the time of resolution. Charge-offs
exclude $94 million and $27 million for the three
months ended June 30, 2008 and 2007, respectively, and
$251 million and $41 million for the six months
ended June 30, 2008 and 2007, respectively, related to
reserve amounts previously transferred to reduce the carrying
value of loans purchased under financial guarantees. Recoveries
of charge-offs primarily result from foreclosure alternatives
and Real Estate Owned, or REO, acquisitions on loans where a
share of default risk has been assumed by mortgage insurers,
servicers or other third parties through credit enhancements.
|
(2)
|
Effective December 2007, we no longer automatically purchase
loans from PC pools once they become 120 days delinquent,
but rather, we purchase loans from PCs when the loans have been
120 days delinquent and (a) the loans are modified,
(b) foreclosure sales occur, (c) the loans have been
delinquent for 24 months or (d) the cost of guarantee
payments to PC holders, including advances of interest at the PC
coupon, exceeds the expected cost of holding the nonperforming
mortgage in our retained portfolio. Consequently, the increase
in charge-offs in PCs and Structured Securities during the three
and six months ended June 30, 2008, as compared to the
three and six months ended June 30, 2007, respectively, is
due to this operational change under which loans proceed to a
loss event (upon a foreclosure sale) while in a PC pool.
|
(3)
|
Consist primarily of: (a) the transfer of a proportional
amount of the recognized reserves for guaranteed losses related
to PC pools associated with non-performing loans purchased from
mortgage pools underlying our PCs, Structured Securities and
long-term standby agreements to establish the initial recorded
investment in these loans at the date of our purchase and
(b) amounts attributable to uncollectible interest on PCs
and Structured Securities in our retained portfolio.
|
Impaired
Loans
Single-family impaired loans include performing and
non-performing loan modifications, as well as delinquent or
modified loans that were purchased from mortgage pools
underlying our PCs and Structured Securities and long-term
standby agreements. Multifamily impaired loans include loans
whose contractual terms have previously been modified due to
credit concerns (including troubled debt restructurings),
certain loans with observable collateral deficiencies, and loans
impaired based on managements judgments concerning other
known facts and circumstances associated with those loans.
Recorded investment on impaired loans includes the unpaid
principal balance plus amortized basis adjustments, which are
modifications to the loans carrying value.
Single-family mortgage loans are aggregated based on similar
risk characteristics and measured for impairment using the
present value of the future expected cash flows. Multifamily
loans are measured individually for impairment based on the fair
value of the underlying collateral as the repayment of these
loans is generally provided from the cash flows of the
underlying collateral. Total loan loss reserves, as presented in
Table 5.2 Detail of Loan Loss Reserves,
consists of a specific valuation allowance related to impaired
mortgage loans, which is presented in Table 5.3, and an
additional reserve for other probable incurred losses, which
totaled $5,788 million and $2,809 million at
June 30, 2008 and December 31, 2007, respectively. Our
recorded investment in impaired mortgage loans and the related
valuation allowance are summarized in Table 5.3. The
specific allowance presented in Table 5.3 is determined
using estimates of the fair value of the underlying collateral
and insurance or other recoveries, less estimated selling costs.
Table 5.3
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Recorded
|
|
|
Specific
|
|
|
Net
|
|
|
Recorded
|
|
|
Specific
|
|
|
Net
|
|
|
|
Investment
|
|
|
Reserve
|
|
|
Investment
|
|
|
Investment
|
|
|
Reserve
|
|
|
Investment
|
|
|
|
(in millions)
|
|
|
Impaired loans having:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related valuation allowance
|
|
$
|
417
|
|
|
$
|
(25
|
)
|
|
$
|
392
|
|
|
$
|
155
|
|
|
$
|
(13
|
)
|
|
$
|
142
|
|
No related valuation
allowance(1)
|
|
|
7,633
|
|
|
|
|
|
|
|
7,633
|
|
|
|
8,579
|
|
|
|
|
|
|
|
8,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,050
|
|
|
$
|
(25
|
)
|
|
$
|
8,025
|
|
|
$
|
8,734
|
|
|
$
|
(13
|
)
|
|
$
|
8,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Primarily represent performing
single-family troubled debt restructuring loans and those
delinquent loans purchased out of PC pools that have not been
impaired subsequent to acquisition.
|
The average investment in impaired loans was $8.2 billion
and $7.5 billion for the six months ended June 30,
2008 and for the year ended December 31, 2007, respectively.
Interest income foregone on impaired loans was approximately
$13 million and $39 million for the six months ended
June 30, 2008 and 2007, respectively.
Loans
Acquired under Financial Guarantees
We have the option under our PC agreements to purchase mortgage
loans from the loan pools that underlie our guarantees under
certain circumstances to resolve an existing or impending
delinquency or default. Prior to December 2007, our practice was
to automatically purchase the mortgage loans when the loans were
significantly past due, generally after 120 days of
delinquency. Effective December 2007, our practice is to
purchase loans from pools when the loans have been 120 days
delinquent and (a) the loans are modified;
(b) foreclosure sales occur; (c) the loans have been
delinquent for 24 months; or (d) the cost of guarantee
payments to PC holders, including advances of interest at the PC
coupon, exceeds the expected cost of holding the nonperforming
mortgage in our retained portfolio. Loans purchased from PC
pools that underlie our guarantees or that are covered by our
standby commitments are recorded at the lesser of their initial
investment or the loans fair value. Our estimate of the
fair value of delinquent loans purchased from pools is
determined by obtaining indicative market prices from large,
experienced dealers and using an average of these market prices
to estimate the initial fair value. We recognize losses on loans
purchased in our consolidated statements of income when, upon
purchase, the fair value is less than the acquisition cost of
the loan. At June 30, 2008 and 2007, the unpaid principal
balances of mortgage loans in our retained portfolio acquired
under financial guarantees were $6.1 billion and
$4.7 billion, respectively, while the carrying amounts of
these loans were $4.7 billion and $4.1 billion,
respectively.
We account for loans acquired in accordance with
SOP 03-3
if, at acquisition, the loans have credit deterioration and we
do not consider it probable that we will collect all contractual
cash flows from the borrower without significant delay. We
concluded that all loans acquired under financial guarantees
during all periods presented met this criterion. Table 5.4
provides details on impaired loans acquired under financial
guarantees and accounted for in accordance with
SOP 03-3.
Table 5.4
Loans Acquired Under Financial Guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Contractual principal and interest payments at acquisition
|
|
$
|
874
|
|
|
$
|
2,008
|
|
|
$
|
1,384
|
|
|
$
|
4,017
|
|
Non-accretable difference
|
|
|
(49
|
)
|
|
|
(86
|
)
|
|
|
(71
|
)
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows expected to be collected at acquisition
|
|
|
825
|
|
|
|
1,922
|
|
|
|
1,313
|
|
|
|
3,871
|
|
Accretable balance
|
|
|
(275
|
)
|
|
|
(440
|
)
|
|
|
(412
|
)
|
|
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial investment in acquired loans at acquisition
|
|
$
|
550
|
|
|
$
|
1,482
|
|
|
$
|
901
|
|
|
$
|
3,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The excess of contractual principal and interest over the
undiscounted amount of cash flows we expect to collect
represents a non-accretable difference that is neither accreted
to interest income nor displayed on the consolidated balance
sheets. The amount that may be accreted into interest income on
such loans is limited to the excess of our estimate of
undiscounted expected principal, interest and other cash flows
from the loan over our initial investment in the loan. We
consider estimated prepayments when calculating the accretable
balance and the non-accretable difference. While these loans are
seriously delinquent, no amounts are accreted to interest
income. Subsequent changes in estimated future cash flows to be
collected related to interest-rate changes are recognized
prospectively in interest income over the remaining contractual
life of the loan. We increase our allowance for loan losses if
there is a decline in estimates of future cash collections due
to further credit deterioration. Subsequent to acquisition, we
recognized an increase in provision for credit losses related to
these loans of $2 million and $1 million for the three
months ended June 30, 2008 and 2007, respectively, and
$5 million and $2 million for the six months ended
June 30, 2008 and 2007, respectively.
Table 5.5 provides changes in the accretable balance of
loans acquired under financial guarantees and accounted for in
accordance with
SOP 03-3.
Table 5.5
Changes in Accretable Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
2,249
|
|
|
$
|
855
|
|
|
$
|
2,407
|
|
|
$
|
510
|
|
Additions from new acquisitions
|
|
|
275
|
|
|
|
440
|
|
|
|
412
|
|
|
|
821
|
|
Accretion during the period
|
|
|
(91
|
)
|
|
|
(65
|
)
|
|
|
(168
|
)
|
|
|
(65
|
)
|
Reductions(1)
|
|
|
(120
|
)
|
|
|
(73
|
)
|
|
|
(345
|
)
|
|
|
(108
|
)
|
Change in estimated cash
flows(2)
|
|
|
(25
|
)
|
|
|
13
|
|
|
|
106
|
|
|
|
37
|
|
Reclassifications to or from nonaccretable
difference(3)
|
|
|
(77
|
)
|
|
|
(46
|
)
|
|
|
(201
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,211
|
|
|
$
|
1,124
|
|
|
$
|
2,211
|
|
|
$
|
1,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represent the recapture of losses
previously recognized due to borrower repayment or foreclosure
on the loan.
|
(2)
|
Represents the change in expected
cash flows due to troubled debt restructurings or changes in the
prepayment assumptions of the related loans.
|
(3)
|
Represent the change in expected
cash flows due to changes in credit quality or credit
assumptions.
|
Delinquency
Rates
Table 5.6 summarizes the delinquency performance for our
total mortgage portfolio, excluding non-Freddie Mac
mortgage-related securities and that portion of Structured
Securities backed by Ginnie Mae Certificates.
Table 5.6
Delinquency Performance
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Delinquencies:
|
|
|
|
|
|
|
|
|
Single-family:(1)
|
|
|
|
|
|
|
|
|
Non-credit-enhanced
portfolio(2)
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
0.67
|
%
|
|
|
0.45
|
%
|
Total number of delinquent loans
|
|
|
68,080
|
|
|
|
44,948
|
|
Credit-enhanced
portfolio(2)
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
2.10
|
%
|
|
|
1.62
|
%
|
Total number of delinquent loans
|
|
|
47,216
|
|
|
|
34,621
|
|
Total
portfolio(2)
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
0.93
|
%
|
|
|
0.65
|
%
|
Total number of delinquent loans
|
|
|
115,296
|
|
|
|
79,569
|
|
Structured
Transactions(3):
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
11.86
|
%
|
|
|
9.86
|
%
|
Total number of delinquent loans
|
|
|
15,366
|
|
|
|
14,122
|
|
Total single-family:
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
1.04
|
%
|
|
|
0.76
|
%
|
Total number of delinquent loans
|
|
|
130,662
|
|
|
|
93,691
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Total portfolio
|
|
|
|
|
|
|
|
|
Delinquency
rate(4)
|
|
|
0.04
|
%
|
|
|
0.02
|
%
|
Net carrying value of delinquent loans (in millions)
|
|
$
|
34
|
|
|
$
|
10
|
|
|
|
(1)
|
Based on the number of mortgages
90 days or more delinquent or in foreclosure. Delinquencies
on mortgage loans underlying certain Structured Securities,
long-term standby commitments and Structured Transactions may be
reported on a different schedule due to variances in industry
practice.
|
(2)
|
Excluding Structured Transactions.
|
(3)
|
Structured Transactions generally
have underlying mortgage loans with a variety of risk
characteristics but may provide inherent credit protections from
losses due to underlying subordination, excess interest,
overcollateralization and other features.
|
(4)
|
Multifamily delinquency performance
is based on net carrying value of mortgages 90 days or more
delinquent rather than on a unit basis and excludes multifamily
Structured Transactions, which were approximately 1% of our
total multifamily portfolio at both June 30, 2008 and
December 31, 2007, respectively. There were no
delinquencies for our multifamily Structured Transactions at
both June 30, 2008 and December 31, 2007.
|
NOTE 6:
REAL ESTATE OWNED
For periods presented below, the weighted average holding period
for our disposed properties was less than one year.
Table 6.1 provides a summary of our REO activity.
Table 6.1
REO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,698
|
|
|
$
|
(484
|
)
|
|
$
|
2,214
|
|
|
$
|
1,021
|
|
|
$
|
(143
|
)
|
|
$
|
878
|
|
Additions
|
|
|
1,755
|
|
|
|
(106
|
)
|
|
|
1,649
|
|
|
|
575
|
|
|
|
(35
|
)
|
|
|
540
|
|
Dispositions and write-downs
|
|
|
(1,240
|
)
|
|
|
(43
|
)
|
|
|
(1,283
|
)
|
|
|
(416
|
)
|
|
|
18
|
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,213
|
|
|
$
|
(633
|
)
|
|
$
|
2,580
|
|
|
$
|
1,180
|
|
|
$
|
(160
|
)
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,067
|
|
|
$
|
(331
|
)
|
|
$
|
1,736
|
|
|
$
|
871
|
|
|
$
|
(128
|
)
|
|
$
|
743
|
|
Additions
|
|
|
3,140
|
|
|
|
(190
|
)
|
|
|
2,950
|
|
|
|
1,066
|
|
|
|
(64
|
)
|
|
|
1,002
|
|
Dispositions and write-downs
|
|
|
(1,994
|
)
|
|
|
(112
|
)
|
|
|
(2,106
|
)
|
|
|
(757
|
)
|
|
|
32
|
|
|
|
(725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,213
|
|
|
$
|
(633
|
)
|
|
$
|
2,580
|
|
|
$
|
1,180
|
|
|
$
|
(160
|
)
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognized losses of $183 million and $18 million
for the three months ended June 30, 2008 and 2007,
respectively, and $292 million and $33 million for the
six months ended June 30, 2008 and 2007, respectively, on
single-family REO dispositions, which are included in REO
operations expense. The number of single-family property
additions to our REO balance increased by 148% and 132% for the
three and six months ended June 30, 2008, compared to
the three and six months ended June 30, 2007.
Increases in our single-family REO acquisitions have been most
significant in the North Central, West and Southeast regions.
The West region represents approximately 26% of the new
acquisitions during the six months ended June 30, 2008,
based on the number of units, and the highest concentration in
the West region is in the state of California. At June 30,
2008, our REO inventory in California represented approximately
25% of our total REO inventory. We increased our valuation
allowance for single-family REO by $118 million and
$232 million for the three and six months ended
June 30, 2008, to account for increased volume of REO
properties and declines in home prices during the six months
ended June 30, 2008.
NOTE 7:
DEBT SECURITIES AND SUBORDINATED BORROWINGS
Debt securities are classified as either due within one year or
due after one year based on their remaining contractual
maturity. Table 7.1 summarizes the balances and effective
rates for debt securities and subordinated borrowings.
Table 7.1
Total Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Par Value
|
|
|
Balance,
Net(1)
|
|
|
Effective
Rate(2)
|
|
|
Par Value
|
|
|
Balance,
Net(1)
|
|
|
Effective
Rate(2)
|
|
|
|
(dollars in millions)
|
|
|
Senior debt, due within one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reference
Bills®
securities and discount notes
|
|
$
|
231,452
|
|
|
$
|
230,148
|
|
|
|
2.36
|
%
|
|
$
|
198,323
|
|
|
$
|
196,426
|
|
|
|
4.52
|
%
|
Medium-term notes
|
|
|
12,105
|
|
|
|
12,105
|
|
|
|
2.49
|
|
|
|
1,175
|
|
|
|
1,175
|
|
|
|
4.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt securities
|
|
|
243,557
|
|
|
|
242,253
|
|
|
|
2.37
|
|
|
|
199,498
|
|
|
|
197,601
|
|
|
|
4.52
|
|
Current portion of long-term debt
|
|
|
84,108
|
|
|
|
84,050
|
|
|
|
4.51
|
|
|
|
98,432
|
|
|
|
98,320
|
|
|
|
4.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt, due within one year
|
|
|
327,665
|
|
|
|
326,303
|
|
|
|
2.92
|
|
|
|
297,930
|
|
|
|
295,921
|
|
|
|
4.49
|
|
Senior debt, due after one
year(3)
|
|
|
537,067
|
|
|
|
505,013
|
|
|
|
4.62
|
|
|
|
478,547
|
|
|
|
438,147
|
|
|
|
5.24
|
|
Subordinated debt, due after one
year(4)
|
|
|
4,784
|
|
|
|
4,496
|
|
|
|
5.60
|
|
|
|
4,784
|
|
|
|
4,489
|
|
|
|
5.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior and subordinated debt, due after one year
|
|
|
541,851
|
|
|
|
509,509
|
|
|
|
4.63
|
|
|
|
483,331
|
|
|
|
442,636
|
|
|
|
5.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
869,516
|
|
|
$
|
835,812
|
|
|
|
|
|
|
$
|
781,261
|
|
|
$
|
738,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents par value, net of
associated discounts, premiums and hedging-related basis
adjustments, with $362 million of current portion of
long-term debt and $14.8 billion of senior debt, due after
one year that represents the fair value of foreign-currency
denominated debt in accordance with SFAS 159 at
June 30, 2008.
|
(2)
|
Represents the weighted average
effective rate that remains constant over the life of the
instrument, which includes the amortization of discounts or
premiums, issuance costs and hedging-related basis adjustments.
|
(3)
|
Balance, net for senior debt, due
after one year includes callable debt of $234.4 billion and
$202.0 billion at June 30, 2008 and December 31,
2007, respectively.
|
(4)
|
Balance, net for subordinated debt,
due after one year includes callable debt of $ at both
June 30, 2008 and December 31, 2007.
|
For the three and six months ended June 30, 2008, we
recognized fair value gains (losses) of $569 million and
$(816) million on our foreign-currency denominated debt,
respectively, of which $88 million and $(1.1) billion
are gains (losses) related to our net foreign-currency
translation, respectively. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES for additional information
regarding our adoption of SFAS 159.
NOTE 8:
STOCKHOLDERS EQUITY
Stock
Repurchase and Issuance Programs
During the six months ended June 30, 2008, we did not issue
any preferred stock and did not repurchase any of our common
stock.
Dividends
Declared During 2008
On March 7, 2008 and June 6, 2008, our board of
directors declared a quarterly dividend on our common stock of
$0.25 per share and dividends on our preferred stock consistent
with the contractual rates and terms shown in
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 8: STOCKHOLDERS
EQUITY Table 8.1 Preferred
Stock in our Registration Statement.
NOTE 9:
REGULATORY CAPITAL
Table 9.1 summarizes our regulatory capital requirements and
surpluses.
Table 9.1
Regulatory Capital
Requirements(1)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
(in millions)
|
|
Minimum capital requirement
|
|
$
|
28,710
|
|
|
$
|
26,473
|
|
Core capital
|
|
|
37,128
|
|
|
|
37,867
|
|
Minimum capital surplus
|
|
|
8,418
|
|
|
|
11,394
|
|
|
|
|
|
|
|
|
|
|
Critical capital requirement
|
|
$
|
14,746
|
|
|
$
|
13,618
|
|
Core capital
|
|
|
37,128
|
|
|
|
37,867
|
|
Critical capital surplus
|
|
|
22,382
|
|
|
|
24,249
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital
requirement(2)
|
|
|
N/A
|
|
|
$
|
14,102
|
|
Total
capital(2)
|
|
|
N/A
|
|
|
|
40,929
|
|
Risk-based capital
surplus(2)
|
|
|
N/A
|
|
|
|
26,827
|
|
|
|
(1)
|
The Office of Federal Housing
Enterprise Oversight, or OFHEO, is the authoritative source of
the capital calculations that underlie our capital
classifications. The minimum and critical capital values for
June 30, 2008 reflect the amounts we reported to OFHEO.
|
(2)
|
OFHEO determines the amounts
reported with respect to our risk-based capital requirement.
OFHEO has not yet reported amounts for June 30, 2008. OFHEO
reported that our risk-based capital requirement was
$26.1 billion as of March 31, 2008 and our total
capital of $42.2 billion on that date exceeded the
requirement by $16.1 billion.
|
Factors that could adversely affect the adequacy of our
regulatory capital in future periods include our ability to
execute capital transactions; GAAP net losses; continued
declines in home prices; increases in our credit and
interest-rate risk profiles; adverse changes in interest-rates,
the yield curve or implied volatility; adverse option-adjusted
spread, or OAS, changes; impairments of non-agency
mortgage-related securities; counterparty downgrades; downgrades
of non-agency mortgage-related securities (with respect to
risk-based capital); legislative or regulatory actions that
increase capital requirements; or changes in accounting
practices or standards. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES for more information. In
particular, interest-rate levels or implied volatilities could
affect the amount of our core capital, even if we were
economically well hedged against interest-rate changes, because
certain gains or losses are recognized through GAAP earnings
while other offsetting gains or losses may not be. Changes in
OAS can also affect the amount of our core capital, because OAS
is a factor in the valuation of our guaranteed mortgage
portfolio and trading portfolio.
Table 9.2 summarizes our compliance with our subordinated debt
commitment.
Table 9.2
Subordinated Debt
Commitment(1)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
(in millions)
|
|
Total on-balance sheet assets and guaranteed PCs and Structured
Securities outstanding
target(2)
|
|
$
|
41,509
|
|
|
$
|
38,000
|
|
Total capital plus qualifying subordinated debt
|
|
|
46,585
|
|
|
|
44,559
|
|
Surplus
|
|
|
5,076
|
|
|
|
6,559
|
|
|
|
(1)
|
The values for June 30, 2008
reflect the amounts we reported to OFHEO.
|
(2)
|
Equals the sum of 0.45% of
outstanding guaranteed PCs and Structured Securities and 4% of
on-balance sheet assets.
|
Regulatory
Capital Monitoring Framework
In a letter dated January 28, 2004, OFHEO created a
framework for monitoring our capital. The letter directed that
we maintain a 30% mandatory target capital surplus over our
statutory minimum capital requirement, subject to certain
conditions and variations; that we submit weekly reports
concerning our capital levels; and that we obtain prior approval
of certain capital transactions. On March 19, 2008, OFHEO
announced a reduction in our mandatory target capital surplus
from 30% to 20% above our statutory minimum capital requirement.
OFHEO has informed us that, upon completion of our
$5.5 billion capital raise, our mandatory target capital
surplus will be reduced from 20% to 15%. OFHEO has also informed
us that it intends a further reduction of our mandatory target
capital surplus from 15% to 10% upon completion of our SEC
registration process, which was completed on July 18, 2008,
our completion of the remaining Consent Order requirement
(i.e., the separation of the positions of Chairman and
Chief Executive Officer), our continued commitment to maintain
capital well above OFHEOs regulatory requirement and no
material adverse changes to ongoing regulatory compliance. For
more information regarding our regulatory capital monitoring
framework see ITEM 13. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES NOTE 9:
REGULATORY CAPITAL in our Registration Statement.
Table 9.3 summarizes our compliance with the mandatory target
capital surplus portion of OFHEOs monitoring framework.
Table 9.3
Mandatory Target Capital
Surplus(1)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
Statutory minimum capital requirement plus
add-on(2)
|
|
$
|
34,451
|
|
|
$
|
34,415
|
|
Core capital
|
|
|
37,128
|
|
|
|
37,867
|
|
Surplus
|
|
|
2,677
|
|
|
|
3,452
|
|
|
|
(1)
|
The values for June 30, 2008
are based on amounts we reported to OFHEO.
|
(2)
|
Amounts as of June 30, 2008
and December 31, 2007 are based on 20% and 30% mandatory
target capital surplus, respectively.
|
NOTE 10:
DERIVATIVES
We use derivatives to conduct our risk management activities. We
principally use the following types of derivatives:
|
|
|
|
|
LIBOR- and Euro Interbank Offered Rate, or Euribor-, based
interest-rate swaps;
|
|
|
|
LIBOR- and Treasury-based options (including swaptions);
|
|
|
|
LIBOR- and Treasury-based exchange-traded futures; and
|
|
|
|
Foreign-currency swaps.
|
Our derivative portfolio also includes certain purchase and sale
commitments and other contractual agreements, including credit
derivatives and swap guarantee derivatives in which we guarantee
the sponsors or the borrowers performance as a
counterparty on certain interest-rate swaps.
Beginning in the first quarter of 2008, we began designating
certain derivative positions as cash flow hedges of changes in
cash flows associated with our forecasted issuances of debt
while maintaining our risk management goals. In the periods
presented prior to 2008, we only elected cash flow hedge
accounting relationships for certain commitments to sell
mortgage-related securities. We believe this expanded hedging
will reduce volatility in our consolidated statements of income.
For a derivative accounted for as a cash flow hedge, changes in
fair value are reported in AOCI, net of taxes, on our
consolidated balance sheets to the extent the hedge is
effective. The remaining ineffective portion of changes in fair
value is reported as other income on our consolidated statements
of income.
During the three and six months ended June 30, 2008, we
recognized hedge ineffectiveness gains (losses) related to cash
flow hedges of $7 million and $4 million,
respectively, on our consolidated statements of income. During
the three and six months ended June 30, 2007, we did not
recognize any hedge ineffectiveness gains (losses) related to
cash flow hedges on our consolidated statements of income. No
amounts were excluded from the assessment of hedge
effectiveness. We record changes in the fair value of
derivatives not in hedge accounting relationships as derivative
gains (losses) on our consolidated statements of income. Any
associated interest received or paid from derivatives not in
hedge accounting relationships is recognized on an accrual basis
and also recorded in derivative gains (losses) on our
consolidated statements of income. Interest received or paid
from derivatives in qualifying cash flow hedges is recognized on
an accrual basis and is recorded in net interest income on our
consolidated statements of income.
The carrying value of our derivatives on our consolidated
balance sheets is equal to their fair value, including net
derivative interest receivable or payable, net trade/settle
receivable or payable and is net of cash collateral held or
posted, where allowable by a master netting agreement.
Derivatives in a net asset position are reported as derivative
assets, net. Similarly, derivatives in a net liability position
are reported as derivative liabilities, net. Cash collateral we
obtained from counterparties to derivative contracts that has
been offset against derivative assets, net at June 30, 2008
and December 31, 2007 was $8.3 billion and
$6.5 billion, respectively. Cash collateral we posted to
counterparties to derivative contracts that has been offset
against derivative liabilities, net at June 30, 2008 and
December 31, 2007 was $210 million and
$344 million, respectively.
At June 30, 2008 and December 31, 2007, there were no
amounts of cash collateral that were not offset against
derivative assets, net or derivative liabilities, net, as
applicable.
As shown in Table 10.1 the total AOCI, net of taxes, related to
derivatives designated as cash flow hedges was a loss of
$3.4 billion and $4.6 billion at June 30, 2008
and 2007, respectively, composed mainly of deferred net losses
on closed cash flow hedges. Net change in fair value related to
cash flow hedging activities, net of tax, represents the net
change in the fair value of the derivatives that were designated
as cash flow hedges, after the effects of our federal statutory
tax rate of 35%, to the extent the hedges were effective. Net
reclassifications of losses to earnings, net of tax, represents
the AOCI amount, after the effects of our federal statutory tax
rate of 35%, that was recognized in earnings as the originally
hedged forecasted transactions affected earnings, unless it was
deemed probable that the forecasted transaction would not occur.
If it is probable that the forecasted transaction will not
occur, then the deferred gain or loss associated with the hedge
related to the forecasted transaction would be reclassified into
earnings immediately.
Over the next 12 months, we estimate that approximately
$801 million, net of taxes, of the $3.4 billion of
cash flow hedging losses in AOCI, net of taxes, at June 30,
2008 will be reclassified into earnings. The maximum remaining
length of time over which we have hedged the exposure related to
the variability in future cash flows on forecasted transactions,
primarily forecasted debt issuances, is 25 years. However,
over 70% and 90% of AOCI, net of taxes, relating to closed cash
flow hedges at June 30, 2008, will be reclassified to
earnings over the next five and ten years, respectively.
Table
10.1 AOCI, Net of Taxes, Related to Cash Flow Hedge
Relationships
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Beginning
balance(1)
|
|
$
|
(4,059
|
)
|
|
$
|
(5,032
|
)
|
Adjustment to initially apply
SFAS 159(2)
|
|
|
4
|
|
|
|
|
|
Net change in fair value related to cash flow hedging
activities, net of
tax(3)
|
|
|
204
|
|
|
|
(37
|
)
|
Net reclassifications of losses to earnings and other, net of
tax(4)
|
|
|
433
|
|
|
|
495
|
|
|
|
|
|
|
|
|
|
|
Ending
balance(1)
|
|
$
|
(3,418
|
)
|
|
$
|
(4,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the effective portion of
the fair value of open derivative contracts (i.e., net
unrealized gains and losses) and net deferred gains and losses
on closed (i.e., terminated or redesignated) cash flow
hedges.
|
(2)
|
Net of tax benefit of $ for
the six months ended June 30, 2008.
|
(3)
|
Net of tax (benefit) expense of
$112 million and $(20) million for the six months
ended June 30, 2008 and 2007, respectively.
|
(4)
|
Net of tax benefit of
$233 million and $266 million for the six months ended
June 30, 2008 and 2007, respectively.
|
NOTE 11:
LEGAL CONTINGENCIES
We are involved as a party to a variety of legal proceedings
arising from time to time in the ordinary course of business
including, among other things, contractual disputes, personal
injury claims, employment-related litigation and other legal
proceedings incidental to our business. We are frequently
involved, directly or indirectly, in litigation involving
mortgage foreclosures. From time to time, we are also involved
in proceedings arising from our termination of a
seller/servicers eligibility to sell mortgages to, and/or
service mortgages for, us. In these cases, the former
seller/servicer sometimes seeks damages against us for wrongful
termination under a variety of legal theories. In addition, we
are sometimes sued in connection with the origination or
servicing of mortgages. These suits typically involve claims
alleging wrongful actions of seller/servicers. Our contracts
with our seller/servicers generally provide for indemnification
against liability arising from their wrongful actions.
Litigation and claims resolution are subject to many
uncertainties and are not susceptible to accurate prediction. In
accordance with SFAS No. 5, Accounting for
Contingencies, or SFAS 5, we reserve for
litigation claims and assessments asserted or threatened against
us when a loss is probable and the amount of the loss can be
reasonably estimated.
Putative Securities Class Action
Lawsuits. Reimer vs. Freddie Mac, Syron, Cook,
Piszel and McQuade (Reimer) and Ohio Public
Employees Retirement System vs. Freddie Mac, Syron, et al
(OPERS). Two virtually identical putative
securities class action lawsuits were filed against Freddie Mac
and certain of our current and former officers alleging that the
defendants violated federal securities laws by making
false and misleading statements concerning our business,
risk management and the procedures we put into place to protect
the company from problems in the mortgage industry. Reimer
was filed on November 21, 2007 in the U.S. District
Court for the Southern District of New York and OPERS was filed
on January 18, 2008 in the U.S. District Court for the
Northern District of Ohio. On March 10, 2008, the Court in
Reimer granted the plaintiffs request to voluntarily
dismiss the case, and the case was dismissed. In OPERS, on
April 10, 2008, the court appointed OPERS as lead plaintiff
and approved its choice of counsel. The plaintiff is seeking
unspecified damages and interest, and reasonable costs and
expenses, including attorney and expert fees. At present, it is
not possible to predict the probable outcome of the OPERS
lawsuit or any potential impact on our business, financial
condition, or results of operations.
Shareholder Demand Letters. In late 2007 and
early 2008, the board of directors received three letters from
purported shareholders of Freddie Mac, which together contain
allegations of corporate mismanagement and breaches of fiduciary
duty in connection with the companys risk management,
alleged false and misleading financial disclosures, and the
alleged sale of stock based on material non-public information
by certain officers and directors. One letter demands that the
board commence an independent investigation into the alleged
conduct, institute legal proceedings to recover damages from the
responsible individuals, and implement corporate governance
initiatives to ensure that the alleged problems do not recur.
The second letter demands that Freddie Mac commence legal
proceedings to recover damages from responsible board members,
senior officers, Freddie Macs outside auditors, and other
parties who allegedly aided or abetted the improper conduct. The
third letter demands relief similar to that of the second
letter, as well as recovery for unjust enrichment. The board of
directors formed a Special Litigation Committee to investigate
the purported shareholders allegations, and the
investigation is proceeding.
Shareholder Derivative Lawsuits. A shareholder
derivative complaint, purportedly on behalf of Freddie Mac, was
filed on March 10, 2008, in the U.S. District Court
for the Southern District of New York against certain current
and former officers and directors of Freddie Mac and a number of
third parties, including Freddie Macs auditor,
PricewaterhouseCoopers LLP. The complaint, which was filed by an
individual who had submitted a shareholder demand letter to the
board of directors in late 2007, alleges breach of fiduciary
duty, negligence, violations of the Sarbanes-Oxley Act of 2002
and unjust enrichment in connection with various alleged
business and risk management failures. It also alleges false
assurances by the company regarding our financial exposure in
the subprime financing market, our risk management and our
internal controls. The plaintiff seeks unspecified damages,
declaratory relief, an accounting, injunctive relief,
disgorgement, punitive damages, attorneys fees, interest
and costs. On June 16, 2008, we filed a motion to transfer
the case to the Eastern District of Virginia, or alternatively
to stay the case pending the completion of the investigation of
plaintiffs allegations by the Special Litigation Committee
appointed by the board of directors. At present, it is not
possible to predict the probable outcome of the lawsuit or any
potential impact on our business, financial condition or results
of operations.
A second shareholder derivative complaint, purportedly on behalf
of Freddie Mac, was filed on June 6, 2008, in the
U.S. District Court for the Southern District of New York
against certain current and former Freddie Mac officers and
directors. The complaint, which was filed by an individual who
had submitted a shareholder demand letter to the board of
directors in late 2007, alleges that defendants caused the
company to violate its charter by engaging in unsafe,
unsound and improper speculation in high risk mortgages to boost
near term profits, report growth in the Companys retained
portfolio and guarantee business, and take market share away
from its primary competitor, Fannie Mae. Plaintiff asserts
claims for alleged breach of fiduciary duty and declaratory and
injunctive relief. Among other things, plaintiff also seeks an
accounting, an order requiring that defendants remit all salary
and compensation received during the periods they allegedly
breached their duties, and an award of pre-judgment and
post-judgment interest, attorneys fees, expert fees and
consulting fees, and other costs and expenses. At present, it is
not possible to predict the probable outcome of the lawsuit or
any potential impact on our business, financial condition or
results of operations.
In addition, on July 24, 2008, The Adams Family Trust and
Kevin Tashjian filed a purported derivative lawsuit in the
U.S. District Court for the Eastern District of Virginia
against certain current and former officers and directors of
Freddie Mac, with Freddie Mac named as a nominal defendant in
the action. The Adams Family Trust and Kevin Tashjian had
previously sent a derivative demand letter to the board of
directors on March 26, 2008 requesting that it commence
legal proceedings against senior management and certain
directors to recover damages for their alleged wrongdoing.
Similar to the two other shareholder derivative actions
described above, this complaint alleges that the defendants
breached their fiduciary duties by failing to implement
and/or
maintain sufficient risk management and other controls; failing
to adequately reserve for uncollectible loans and other risks of
loss; and making false and misleading statements regarding the
companys exposure to the sub-prime market, the strength of
the companys risk management and internal controls, and
the companys underwriting standards in response to alleged
abuses in the sub-prime industry. The plaintiffs also allege
that current and former officers and directors breached their
fiduciary duties and unjustly enriched themselves through their
sale of stock based on material non-public information. At
present, it is not possible to predict the probable outcome of
the lawsuit or any potential impact on our business, financial
condition or results of operations.
Antitrust Lawsuits. Consolidated lawsuits were
filed against Fannie Mae and Freddie Mac in the
U.S. District Court for the District of Columbia,
originally filed on January 10, 2005, alleging that both
companies conspired to establish and maintain artificially high
management and guarantee fees. The complaint covers the period
January 1, 2001 to the present and asserts a variety of
claims under federal and state antitrust laws, as well as claims
under consumer-protection and similar state laws. The plaintiffs
seek injunctive relief, unspecified damages (including treble
damages with respect to the antitrust claims and punitive
damages with respect to some of the state claims) and other
forms of relief. We filed a motion to dismiss the action and are
awaiting a ruling from the court. At present, it is not possible
for us to predict the probable outcome of the consolidated
lawsuit or any potential impact on our business, financial
condition or results of operations.
The New York Attorney Generals
Investigation. In connection with the New York
Attorney Generals suit filed against eAppraiseIT and its
parent corporation, First American, alleging appraisal fraud in
connection with loans originated by Washington Mutual, in
November 2007, the New York Attorney General demanded that we
either retain an independent examiner to investigate our
mortgage purchases from Washington Mutual supported by
appraisals conducted by eAppraiseIT, or immediately cease and
desist from purchasing or securitizing Washington Mutual loans
and any loans supported by eAppraiseIT appraisals. We also
received a subpoena from the New York Attorney Generals
office for information regarding appraisals and property
valuations as they relate to our mortgage purchases and
securitizations from January 1, 2004 to the present. In
March 2008, OFHEO, the New York Attorney General and Freddie Mac
reached a settlement in which we agreed to adopt a Home
Valuation Protection Code, effective January 1, 2009, to
enhance appraiser independence. In addition, we agreed to
provide funding for an Independent Valuation Protection
Institute. From March 14, 2008 through April 30, 2008,
market participants were afforded the opportunity to comment on
the implementation and deployment of the Code. We have reviewed
and summarized the comments received, which were submitted to
and discussed with OFHEO. Under the terms of the agreement,
OFHEO, the New York Attorney General and Freddie Mac are
reviewing the comments in good faith and will consider any
amendments to the Code necessary to avoid any unforeseen
consequences.
NOTE 12:
INCOME TAXES
For the six months ending June 30, 2008 and 2007, we
reported income tax benefits of $1.5 billion and
$303 million, respectively, representing effective tax
rates of 60% and (103)%, respectively. Our effective tax rate
was favorably impacted by our investments in LIHTC partnerships,
interest earned on tax-exempt housing-related securities and the
favorable settlement with the IRS as discussed below.
Deferred
Tax Asset
Table
12.1 Net Deferred Tax Asset / (Liability)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred fees related to securitizations
|
|
$
|
3,489
|
|
|
$
|
3,680
|
|
Basis differences related to derivative instruments
|
|
|
3,305
|
|
|
|
3,477
|
|
Credit related items and reserve for loan losses
|
|
|
1,945
|
|
|
|
1,013
|
|
Employee compensation and benefit plans
|
|
|
208
|
|
|
|
196
|
|
Unrealized (gains) losses related to available-for-sale
securities
|
|
|
11,156
|
|
|
|
3,791
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
$
|
20,103
|
|
|
$
|
12,157
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Premium and discount amortization
|
|
$
|
(1,392
|
)
|
|
$
|
(1,380
|
)
|
Basis differences related to assets held for investment
|
|
|
(280
|
)
|
|
|
(431
|
)
|
Other items, net
|
|
|
(32
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax (liability)
|
|
|
(1,704
|
)
|
|
|
(1,853
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset / (liability)
|
|
$
|
18,399
|
|
|
$
|
10,304
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008, we had a net deferred tax asset of
$18 billion of which $11 billion related to the tax
effect of losses in our available-for-sale securities portfolio.
We believe that the realization of our net deferred tax asset is
more likely than not. In making this determination, we
considered all available evidence, both positive and negative.
The positive evidence we considered primarily included our
intent and ability to hold the available-for-sale securities
until losses can be recovered, our history of taxable income,
capital adequacy and the duration of statutory carryback and
carryforward periods and forecasts of future profitability. The
negative evidence we considered was the three-year cumulative
book loss, including losses in AOCI and the difficulty in
predicting potential unsettled circumstances. If future events
significantly differ from our current forecasts, a valuation
allowance may need to be established.
Prevailing market trends and conditions in the U.S. housing
market have created difficulties for mortgage lending
institutions and contributed to our experiencing cumulative
pre-tax book losses over the most recent three-year period. Such
cumulative losses generally make it difficult to conclude under
FAS 109 that a valuation allowance is not needed. However,
our strong earnings history and our assessment that the
prevailing market trends and conditions in the U.S. housing
market are not a continuing condition support the conclusion
that a valuation allowance is not needed. Our strong earnings
history on a pre-tax book income basis is also reflected in our
historical federal income tax returns. In addition, we
anticipate that we will be able to generate future taxable
income from the following sources to realize our deferred tax
assets: (1) reversals of existing taxable temporary
differences; (2) taxable income exclusive of reversing
temporary differences and carryforwards; (3) taxable income
in prior carryback years; and (4) tax-planning strategies.
At June 30, 2008, we have no tax credit carryforwards.
However, we expect that our ability to use all of the tax
credits generated by existing or future investments in LIHTC
partnerships to reduce our federal income tax liability may be
limited by the alternative minimum tax in the future.
Unrecognized
Tax Benefits
At June 30, 2008, we had total unrecognized tax benefits,
exclusive of interest, of $584 million. Included in the
$584 million are $2 million of unrecognized tax
benefits, that if recognized, would favorably affect our
effective tax rate. The unrecognized tax benefits changed from
$637 million at December 31, 2007 to $584 million
at June 30, 2008, primarily due to the settlement with the
IRS. The settlement had a favorable impact on our effective tax
rate. The remaining $582 million of unrecognized tax
benefits at June 30, 2008 related to tax positions for
which ultimate deductibility is highly certain, but for which
there is uncertainty as to the timing of such deductibility.
Recognition of these tax benefits, other than applicable
interest, would not affect our effective tax rate.
We continue to recognize interest and penalties, if any, in
income tax expense. As of June 30, 2008, we had total
accrued interest receivable, net of tax effect, of
$159 million. The total accrued interest receivable changed
from $55 million at December 31, 2007 to
$159 million at June 30, 2008 primarily relating to
the settlement with the IRS. Amounts included in total accrued
interest relate to: (a) unrecognized tax benefits;
(b) pending claims with the IRS for open tax years;
(c) the tax benefit related to tax refund claims; and
(d) the impact of payments made to the IRS in prior years
in anticipation of potential tax deficiencies. Of the
$159 million of accrued interest receivable as of
June 30, 2008, approximately $136 million
of accrued interest payable, net of tax effect, is allocable to
unrecognized tax benefits. We have no amount accrued for
penalties.
The statute of limitations for federal income tax purposes is
open on corporate income tax returns filed for years 1985 to
2006. The IRS is currently examining tax years 2003 to 2005 and
has completed its examination of years 1998 to 2002. The
principal matter in controversy as the result of the
examinations involves questions of timing and potential
penalties regarding our tax accounting method for certain
hedging transactions. Tax years 1985 to 1997 are before the U.S.
Tax Court. In June 2008 we reached agreement with the IRS on a
settlement regarding the tax treatment of the customer
relationship intangible asset recognized upon our transition
from non-taxable to taxable status in 1985. The settlement
agreement is subject to review by the Joint Committee on
Taxation of the U.S. Congress. As a result of this agreement, we
remeasured the tax benefit from this uncertain tax position and
recognized $171 million of tax and interest in the second
quarter of 2008. If approved, the customer relationships
settlement agreement will resolve the last matter to be decided
by the U.S. Tax Court in the current litigation. Those matters
not resolved by settlement agreement in the case, including the
favorable financing intangible asset decided favorably by the
Court in 2005, are subject to appeal.
We believe it is not reasonably possible that significant
changes in the gross balance of unrecognized tax benefits may
occur within the next 12 months that could have a material
impact on income tax expense or benefit in the period the issue
is resolved.
NOTE 13:
EMPLOYEE BENEFITS
We maintain a tax-qualified, funded defined benefit pension
plan, or Pension Plan, covering substantially all of our
employees. We also maintain a nonqualified, unfunded defined
benefit pension plan for our officers as part of our
Supplemental Executive Retirement Plan. We maintain a defined
benefit postretirement health care plan, or Retiree Health Plan,
that generally provides postretirement health care benefits on a
contributory basis to retired employees age 55 or older who
rendered at least 10 years of service (five years of
service if the employee was eligible to retire prior to
March 1, 2007) and who, upon separation or
termination, immediately elected to commence benefits under the
Pension Plan in the form of an annuity. Our Retiree Health Plan
is currently unfunded and the benefits are paid from our general
assets. This plan and our defined benefit pension plans are
collectively referred to as the defined benefit plans.
Effective January 1, 2008, we adopted the measurement date
provisions of SFAS 158. In accordance with SFAS 158,
we have changed the measurement date of our defined benefit plan
assets and obligations from September 30 to our fiscal
year-end date of December 31 using the
15-month
transition method. Under this approach, we used the measurements
determined in our 2007 consolidated financial statements
included in our Registration Statement to estimate the effects
of the measurement date change. As a result of adoption, we
recognized an $8 million decrease in retained earnings
(after tax) at January 1, 2008 and the impact to AOCI
(after tax) was immaterial.
Table 13.1 presents the components of the net periodic
benefit cost with respect to pension and postretirement health
care benefits for the three and six months ended June 30,
2008 and 2007. Net periodic benefit cost is included in salaries
and employee benefits in our consolidated statements of income.
Table
13.1 Net Periodic Benefit Cost Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
17
|
|
|
$
|
17
|
|
Interest cost on benefit obligation
|
|
|
9
|
|
|
|
7
|
|
|
|
17
|
|
|
|
15
|
|
Expected (return) loss on plan assets
|
|
|
(11
|
)
|
|
|
(10
|
)
|
|
|
(21
|
)
|
|
|
(19
|
)
|
Recognized net actuarial (gain) loss
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
14
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Health Care Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
4
|
|
Interest cost on benefit obligation
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows Related to Defined Benefit Plans
Our general practice is to contribute to our Pension Plan an
amount at least equal to the minimum required contribution, if
any, but no more than the maximum amount deductible for federal
income tax purposes each year. We have not yet determined
whether a contribution to our Pension Plan is required for the
2008 plan year.
NOTE 14:
FAIR VALUE DISCLOSURES
Fair
Value Hierarchy
Effective January 1, 2008, we adopted SFAS 157, which
establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. Fair value
is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. Observable inputs reflect
market data obtained from independent sources. Unobservable
inputs reflect assumptions based on the best information
available under the circumstances. We use valuation techniques
that maximize the use of observable inputs, where available and
minimize the use of unobservable inputs.
The three levels of the fair value hierarchy under SFAS 157
are described below:
|
|
|
|
Level 1:
|
Quoted prices (unadjusted) in active markets that are accessible
at the measurement date for identical assets or liabilities;
|
|
|
Level 2:
|
Quoted prices for similar assets and liabilities in active
markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; inputs other than
quoted market prices that are observable for the asset or
liability; and inputs that are derived principally from or
corroborated by observable market data for substantially the
full term of the assets; and
|
|
|
Level 3:
|
Unobservable inputs for the asset or liability that are
supported by little or no market activity and that are
significant to the fair values.
|
As required by SFAS 157, assets and liabilities are
classified in their entirety within the fair value hierarchy
based on the lowest level input that is significant to the fair
value measurement. Table 14.1 sets forth by level within
the fair value hierarchy assets and liabilities measured and
reported at fair value on a recurring basis in our consolidated
balance sheets at June 30, 2008.
Table 14.1
Assets and Liabilities Measured at Fair Value on a Recurring
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at June 30, 2008
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Netting
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Adjustment(1)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
$
|
|
|
|
$
|
377,460
|
|
|
$
|
134,737
|
|
|
$
|
|
|
|
$
|
512,197
|
|
Trading, at fair value
|
|
|
|
|
|
|
155,785
|
|
|
|
3,809
|
|
|
|
|
|
|
|
159,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
|
|
|
|
533,245
|
|
|
|
138,546
|
|
|
|
|
|
|
|
671,791
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
|
|
|
|
12,865
|
|
|
|
4
|
|
|
|
|
|
|
|
12,869
|
|
Derivative assets, net
|
|
|
98
|
|
|
|
18,187
|
|
|
|
69
|
|
|
|
(17,913
|
)
|
|
|
441
|
|
Guarantee asset, at fair value
|
|
|
|
|
|
|
|
|
|
|
11,019
|
|
|
|
|
|
|
|
11,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets carried at fair value on a recurring basis
|
|
$
|
98
|
|
|
$
|
564,297
|
|
|
$
|
149,638
|
|
|
$
|
(17,913
|
)
|
|
$
|
696,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities denominated in foreign currencies
|
|
$
|
|
|
|
$
|
15,202
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,202
|
|
Derivative liabilities, net
|
|
|
145
|
|
|
|
11,247
|
|
|
|
276
|
|
|
|
(10,758
|
)
|
|
|
910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities carried at fair value on a recurring
basis
|
|
$
|
145
|
|
|
$
|
26,449
|
|
|
$
|
276
|
|
|
$
|
(10,758
|
)
|
|
$
|
16,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents counterparty netting,
cash collateral netting, net trade/settle receivable or payable
and net derivative interest receivable or payable. The net cash
collateral held and net trade/settle payable were
$8.1 billion and $0.1 billion, respectively, at
June 30, 2008. The net interest receivable of derivative
assets and derivative liabilities was $1.0 billion at
June 30, 2008, which was mainly related to interest rate
swaps that we have entered into.
|
Fair
Value Measurements (Level 3)
Level 3 measurements consist of assets and liabilities that
are supported by little or no market activity where observable
inputs are not available. The fair value of these assets and
liabilities is measured using significant inputs that are
considered unobservable. Unobservable inputs reflect assumptions
based on the best information available under the circumstances.
We use valuation techniques that maximize the use of observable
inputs, where available, and minimize the use of unobservable
inputs.
Our Level 3 items mainly represent non-agency residential
mortgage-related securities and our guarantee asset. During the
first half of 2008, the market for non-agency securities backed
by subprime and
Alt-A
mortgage loans became significantly less liquid, which resulted
in lower transaction volumes, wider credit spreads and less
transparency. We transferred our holdings of these securities
into the Level 3 category as inputs that were significant
to their valuation became limited or unavailable. We concluded
that the prices on these securities received from pricing
services and dealers were reflective of significant unobservable
inputs. Our guarantee asset is valued either through obtaining
dealer quotes on similar securities or through an expected cash
flow approach. Because of the broad range of discounts for
liquidity applied by
dealers to these similar securities and because the expected
cash flow valuation approach uses significant unobservable
inputs, we classified the guarantee asset as Level 3. See
NOTE 2 FINANCIAL GUARANTEES AND
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS for more
information about the valuation of our guarantee asset.
Table 14.2 provides a reconciliation of the beginning and ending
balances for assets and liabilities measured at fair value using
significant unobservable inputs (Level 3).
Table 14.2
Fair Value Measurements of Assets and Liabilities Using
Significant Unobservable Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 at Fair Value for the Three Months Ended
June 30, 2008
|
|
|
|
Mortgage-related securities
|
|
|
Non-mortgage-
|
|
|
|
|
|
|
|
|
|
Available-for-sale,
|
|
|
Trading,
|
|
|
related securities:
|
|
|
Guarantee asset,
|
|
|
Net
|
|
|
|
at fair value
|
|
|
at fair value
|
|
|
Available-for-sale
|
|
|
at fair
value(1)
|
|
|
derivatives(2)
|
|
|
|
(in millions)
|
|
|
Balance, March 31, 2008
|
|
$
|
144,199
|
|
|
$
|
3,370
|
|
|
$
|
|
|
|
$
|
9,134
|
|
|
$
|
|
|
Total realized and unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
earnings(3)(4)(5)
|
|
|
(786
|
)
|
|
|
422
|
|
|
|
|
|
|
|
1,591
|
|
|
|
(232
|
)
|
Included in other comprehensive
income(3)(4)
|
|
|
1,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized gains (losses)
|
|
|
1,015
|
|
|
|
422
|
|
|
|
|
|
|
|
1,591
|
|
|
|
(234
|
)
|
Purchases, issuances, sales and settlements, net
|
|
|
(10,737
|
)
|
|
|
147
|
|
|
|
(1
|
)
|
|
|
294
|
|
|
|
27
|
|
Net transfers in and/or out of Level 3
|
|
|
260
|
|
|
|
(130
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
$
|
134,737
|
|
|
$
|
3,809
|
|
|
$
|
4
|
|
|
$
|
11,019
|
|
|
$
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) still
held(6)
|
|
$
|
(826
|
)
|
|
$
|
423
|
|
|
$
|
|
|
|
$
|
1,591
|
|
|
$
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 at Fair Value for the Six Months Ended June 30,
2008
|
|
|
|
Mortgage-related securities
|
|
|
Non-mortgage-
|
|
|
|
|
|
|
|
|
|
Available-for-sale,
|
|
|
Trading,
|
|
|
related securities:
|
|
|
Guarantee asset,
|
|
|
Net
|
|
|
|
at fair value
|
|
|
at fair value
|
|
|
Available-for-sale
|
|
|
at fair
value(1)
|
|
|
derivatives(2)
|
|
|
|
(in millions)
|
|
|
Balance, December 31, 2007
|
|
$
|
19,859
|
|
|
$
|
2,710
|
|
|
$
|
|
|
|
$
|
9,591
|
|
|
$
|
(216
|
)
|
Impact of SFAS 159
|
|
|
(443
|
)
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2008
|
|
|
19,416
|
|
|
|
3,153
|
|
|
|
|
|
|
|
9,591
|
|
|
|
(216
|
)
|
Total realized and unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
earnings(3)(4)(5)
|
|
|
(837
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
671
|
|
|
|
25
|
|
Included in other comprehensive
income(3)(4)
|
|
|
(16,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized gains (losses)
|
|
|
(16,989
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
671
|
|
|
|
24
|
|
Purchases, issuances, sales and settlements, net
|
|
|
(21,717
|
)
|
|
|
772
|
|
|
|
(1
|
)
|
|
|
757
|
|
|
|
(15
|
)
|
Net transfers in and/or out of Level 3
|
|
|
154,027
|
|
|
|
(94
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
$
|
134,737
|
|
|
$
|
3,809
|
|
|
$
|
4
|
|
|
$
|
11,019
|
|
|
$
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) still
held(6)
|
|
$
|
(897
|
)
|
|
$
|
(33
|
)
|
|
$
|
|
|
|
$
|
671
|
|
|
$
|
11
|
|
|
|
(1)
|
We estimate that all amounts
recorded for unrealized gains and losses on our guarantee asset
relate to those amounts still in position. Cash received on our
guarantee asset is presented as settlements in the table. The
amounts reflected as included in earnings represent the periodic
mark-to-fair value of our guarantee asset.
|
(2)
|
Net derivatives include derivative
assets and derivative liabilities prior to counterparty netting,
cash collateral netting, net trade/settle receivable or payable
and net derivative interest receivable or payable.
|
(3)
|
Changes in fair value for
available-for-sale investments are recorded in AOCI, net of
taxes while gains and losses from sales are recorded in gains
(losses) on investment activity on our consolidated statements
of income. For mortgage-related securities classified as
trading, the realized and unrealized gains (losses) are recorded
in gains (losses) on investment activity on our consolidated
statements of income.
|
(4)
|
Changes in fair value of
derivatives are recorded in derivative gains (losses) for those
not designated as accounting hedges, and AOCI, net of taxes for
those accounted for as a cash flow hedge to the extent the hedge
is effective. See ITEM 13. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the
Registration Statement for additional information.
|
(5)
|
Changes in fair value of the
guarantee asset are recorded in gains (losses) on guarantee
asset on our consolidated statements of income. See
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES in the Registration
Statement for additional information.
|
(6)
|
Represents the amount of total
gains or losses for the period, included in earnings,
attributable to the change in unrealized gains (losses) related
to assets and liabilities classified as Level 3 that are
still held at June 30, 2008.
|
Nonrecurring
Fair Value Changes
Certain assets are measured at fair value on our consolidated
balance sheets only if certain conditions exist as of the
balance sheet date. We consider the fair value measurement
related to these assets to be nonrecurring. These assets include
held-for-sale mortgage loans, REO net, as well as impaired
held-for-investment multifamily mortgage loans. These assets are
not measured at fair value on an ongoing basis but are subject
to fair value adjustments in certain circumstances. These
adjustments to fair value usually result from the application of
lower-of-cost-or-fair-value accounting or the write-down of
individual assets to current fair value amounts due to
impairments.
Table 14.3
Assets Measured at Fair Value on a Non-Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
Total Gains (Losses)
|
|
|
|
for Identical
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
June 30, 2008
|
|
|
June 30, 2008(1)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-investment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
76
|
|
|
$
|
76
|
|
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
Held-for-sale
|
|
|
|
|
|
|
|
|
|
|
175
|
|
|
|
175
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
REO,
net(3)
|
|
|
|
|
|
|
|
|
|
|
1,717
|
|
|
|
1,717
|
|
|
|
(117
|
)
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets carried at fair value on a non-recurring
basis
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,968
|
|
|
$
|
1,968
|
|
|
$
|
(122
|
)
|
|
$
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the total gains/losses
recorded on items measured at fair value on a non-recurring
basis as of June 30, 2008.
|
(2)
|
Represents carrying value and
related write-downs of loans for which adjustments are based on
the fair value amounts. These loans include held-for-sale
mortgage loans where the fair value is below cost and impaired
multifamily mortgage loans, which are classified as
held-for-investment and have related valuation allowance.
|
(3)
|
Represents the fair value and
related losses of foreclosed properties that were measured at
fair value subsequent to their initial classification as REO,
net. The carrying amount of REO, net was written down to fair
value of $1.7 billion, less cost to sell of
$130 million (or $1.6 billion) at June 30, 2008.
|
Fair
Value Election
On January 1, 2008, we adopted SFAS 159, which permits
entities to choose to measure many financial instruments and
certain other items at fair value that are not required to be
measured at fair value. We elected the fair value option for
certain available-for-sale mortgage-related securities,
foreign-currency denominated debt and investments in securities
classified as available-for-sale securities and identified as in
the scope of
EITF 99-20.
For additional information regarding the adoption of
SFAS 159, see NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Change in Accounting
Principles.
Certain
Available-for-sale Securities with Fair Value Option
Elected
We elected the fair value option for certain available-for-sale
securities held in our retained portfolio to better reflect the
natural offset these securities provide to fair value changes
recorded on our guarantee asset. We record fair value changes on
our guarantee asset through our consolidated statements of
income. However, we historically classified virtually all of our
securities as available-for-sale and recorded those fair value
changes in AOCI. The securities selected for the fair value
option include principal only strips and certain pass-through
and Structured Securities that contain positive duration
features that provide offset to the negative duration associated
with our guarantee asset. We will continually evaluate new
security purchases to identify the appropriate security mix to
classify as trading to match the changing duration features of
our guarantee asset and the securities that provide offset.
For available-for-sale securities identified as within the scope
of
EITF 99-20,
we elected the fair value option to better reflect the valuation
changes that occur subsequent to impairment write-downs recorded
on these instruments. Under
EITF 99-20
for available-for-sale securities, when an impairment is
considered other-than-temporary, the impairment amount is
recorded in our consolidated statements of income and
subsequently accreted back through interest income as long as
the contractual cash flows occur. Any subsequent periodic
increases in the value of the security are recognized through
AOCI. By electing the fair value option for these instruments,
we will reflect valuation changes through our consolidated
statements of income in the period they occur, including
increases in value.
For mortgage-related securities and investments in securities
that are selected for the fair value option and classified as
trading securities subsequently, the change in fair value for
the three and six months ended June 30, 2008 was recorded
in gains (losses) on investment activity in our consolidated
statements of income. See NOTE 4: RETAINED PORTFOLIO
AND CASH AND INVESTMENTS PORTFOLIO for additional
information regarding the net unrealized gains (losses) on
trading securities, which include gains (losses) for other items
that are not selected for the fair value option. Related
interest income continues to be reported as interest income in
our consolidated statements of income using effective interest
methods. See ITEM 13. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments in Securities in our Registration Statement
for additional information about the measurement and recognition
of interest income on investments in securities.
Foreign-Currency
Denominated Debt with Fair Value Option Elected
In the case of foreign-currency denominated debt, we have
entered into derivative transactions that effectively convert
these instruments to U.S. dollar denominated floating rate
instruments. We have historically recorded the fair value
changes on these derivatives through our consolidated statements
of income in accordance with SFAS 133. However, the
corresponding offsetting change in fair value that occurred in
the debt as a result of changes in interest rates was not
permitted to be recorded in our consolidated statements of
income unless we pursued hedge accounting. As a result, our
consolidated statements of income reflected only the fair value
changes of the derivatives and not the offsetting fair value
changes in the debt resulting from changes in interest rates.
Therefore, we have elected the fair value option on the debt
instruments to better reflect the economic offset that naturally
results from the debt due to changes in interest rates. We
currently do not issue foreign-currency denominated debt and use
of the fair value option in the future for these types of
instruments will be evaluated on a
case-by-case
basis for any new issuances of this type of debt.
The change in fair value of foreign-currency denominated debt
for the three and six months ended June 30, 2008 was
recorded in unrealized gains (losses) on foreign-currency
denominated debt recorded at fair value in our consolidated
statements of income. We were not significantly affected by fair
value changes included in earnings that were attributable to
changes in the instrument-specific credit risk for the three and
six months ended June 30, 2008.
The difference between the aggregate fair value and aggregate
unpaid principal balance for foreign-currency denominated debt
due after one year is $153 million at June 30, 2008.
Related interest expense continues to be reported as interest
expense in our consolidated statements of income. See
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Debt Securities
Issued in our Registration Statement for additional
information about the measurement and recognition of interest
expense on debt securities issued.
Valuation
Methods and Assumptions Subject to Fair Value
Hierarchy
Our Level 1 financial instruments consist of
exchange-traded derivatives where quoted prices exist for the
exact instrument in an active market. Our Level 2
instruments generally consist of high credit quality agency and
non-agency mortgage-related securities, non-mortgage-related
asset-backed securities, interest-rate swaps, option-based
derivatives and foreign-currency denominated debt. These
instruments are generally valued through one of the following
methods: (a) dealer or pricing service values derived by
comparison to recent transactions or similar securities and
adjusting for differences in prepayment or liquidity
characteristics; or (b) modeled through an industry
standard modeling technique that relies upon observable inputs
such as discount rates and prepayment assumptions.
Our Level 3 assets primarily consist of non-agency
mortgage-related securities backed by subprime and Alt-A
mortgage loans and our guarantee asset. While the non-agency
mortgage-related securities were supported by little or no
market activity in the first half of 2008, we value our
non-agency mortgage-related securities based primarily on prices
received from third party pricing services and prices received
from dealers. The techniques used to value these instruments
generally are either (a) a comparison to transactions of
instruments with similar collateral and risk profiles; or
(b) industry standard modeling such as the discounted cash
flow model. For a description of how we determine the fair value
of our guarantee asset, see NOTE 2: FINANCIAL
GUARANTEES AND SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS.
Mortgage
Loans, Held for Investment
Mortgage loans, held for investment include impaired multifamily
mortgage loans, which are not measured at fair value on an
ongoing basis but have been written down to fair value due to
impairment. We classify these impaired multifamily mortgage
loans as Level 3 in the fair value hierarchy as their
valuation includes significant unobservable inputs.
Mortgage
Loans, Held-for-Sale
Mortgage loans, held-for-sale represent single-family and
multifamily mortgage loans held in our retained portfolio. For
single-family mortgage loans, we determine the fair value of
these mortgage loans to calculate lower-of-cost-or-fair-value
adjustments for mortgages classified as held-for-sale for GAAP
purposes, therefore they are measured at fair value on a
non-recurring basis and subject to classification under the fair
value hierarchy.
We determine the fair value of single-family mortgage loans,
excluding delinquent single-family loans purchased out of pools,
based on comparisons to actively traded mortgage-related
securities with similar characteristics. For single-family
mortgage loans, we include adjustments for yield, credit and
liquidity differences to calculate the fair value. For
single-family mortgage loans, part of the adjustments for yield,
credit and liquidity differences represent an implied management
and guarantee fee. To accomplish this, the fair value of the
single-family mortgage loans, excluding delinquent single-family
loans purchased out of pools, includes an adjustment
representing the estimated present value of the additional cash
flows on the mortgage coupon in excess of the coupon expected on
the notional mortgage-related securities. The implied management
and guarantee fee for single-family mortgage loans is also net
of the related credit and other components inherent in our
guarantee obligation. The process for estimating the related
credit and other guarantee obligation components is described in
the Guarantee Obligation section below. Since
the fair values are derived from observable prices with
adjustments that may be significant, they are classified as
Level 3 under the fair value hierarchy.
Mortgage-Related
and Non-Mortgage-Related Securities
Mortgage-related securities represent pass-throughs and other
mortgage-related securities issued by us, Fannie Mae and Ginnie
Mae, as well as non-agency mortgage-related securities. They are
classified as available-for-sale or trading, and are already
reflected at fair value on our GAAP consolidated balance sheets.
Effective January 1, 2008, we elected the fair value option
for selected mortgage-related securities that were classified as
available-for-sale securities and securities identified as in
the scope of impairment analysis under
EITF 99-20
and classified as available-for-sale securities. In conjunction
with our adoption of SFAS 159 we reclassified these
securities from available-for-sale securities to trading
securities on our GAAP consolidated balance sheets and recorded
the changes in fair value during the period for such securities
to gains (losses) on investment activities as incurred. For
additional information on the election of the fair value option
and SFAS 159, see NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Change in Accounting
Principles.
The fair value of securities with readily available third-party
market prices is generally based on market prices obtained from
broker/dealers or reliable third-party pricing service
providers. Such fair values may be measured by using third-party
quotes for similar instruments, adjusted for differences in
contractual terms. Generally, these fair values are classified
as Level 2 in the fair value hierarchy. For other
securities, a market OAS approach based on observable market
parameters is used to estimate fair value. OAS for certain
securities are estimated by deriving the OAS for the most
closely comparable security with an available market price,
using proprietary interest-rate and prepayment models. If
necessary, our judgment is applied to estimate the impact of
differences in prepayment uncertainty or other unique cash flow
characteristics related to that particular security. Fair values
for these securities are then estimated by using the estimated
OAS as an input to the interest-rate and prepayment models and
estimating the net present value of the projected cash flows.
The remaining instruments are priced using other modeling
techniques or by using other securities as proxies. These
securities may be classified as Level 2 or 3 depending on
the significance of the inputs that are not observable.
Certain available-for-sale non-agency mortgage-related
securities whose fair value is determined by reference to prices
obtained from broker/dealers or pricing services were changed
from a Level 2 classification to a Level 3
classification in the first quarter of 2008. Previously, these
valuations relied on observed trades, as evidenced by both
activity observed in the market, and similar prices obtained
from multiple sources. In late 2007, however, the divergence
among prices obtained from these sources increased, and became
significant in the first quarter of 2008. This, combined with
the observed significant reduction in transaction volumes and
widening of credit spreads, led us to conclude that the prices
received from pricing services and dealers were reflective of
significant unobservable inputs. While we believe these prices
to be the best available under the fair value hierarchy, the
classification was changed to Level 3 and remains as such
at June 30, 2008 as these conditions continue to persist.
Derivative
Assets, Net
Derivative assets largely consist of interest-rate swaps,
option-based derivatives, futures and forward purchase and sale
commitments that we account for as derivatives. The carrying
value of our derivatives on our consolidated balance sheets is
equal to their fair value, including net derivative interest
receivable or payable, trade settle receivable or payable and is
net of cash collateral held or posted, where allowable by a
master netting agreement. Derivatives in a net unrealized gain
position are reported as derivative assets, net. Similarly,
derivatives in a net unrealized loss position are reported as
derivative liabilities, net.
The fair values of interest-rate swaps are determined by using
the appropriate yield curves to calculate and discount the
expected cash flows for both the fixed-rate and variable-rate
components of the swap contracts. Option-based derivatives,
which principally include call and put swaptions, are valued
using an option-pricing model. This model uses market interest
rates and market-implied option volatilities, where available,
to calculate the options fair value. Market-implied option
volatilities are based on information obtained from
broker/dealers. Since swaps and option-based derivatives fair
values are determined through models that use observable inputs,
these are generally classified as Level 2 under the fair
value hierarchy. To the extent we have determined that any of
the significant inputs are considered unobservable, these
amounts have been classified as Level 3 under the fair
value hierarchy.
The fair value of exchange-traded futures and options is based
on end-of-day closing prices obtained from third-party pricing
services, therefore they are classified as Level 1 under
the fair value hierarchy.
The fair value of derivative assets considers the impact of
institutional credit risk in the event that the counterparty
does not honor its payment obligation. Our fair value of
derivatives is not adjusted for expected credit losses because
we obtain collateral from most counterparties, typically within
one business day of the daily market value calculation, and
substantially all of our credit risk arises from counterparties
with investment-grade credit ratings of A or above.
Certain purchase and sale commitments are also considered to be
derivatives and are classified as Level 2 or Level 3
under the fair value hierarchy, depending on the fair value
hierarchy classification of the purchased or sold item, whether
security or loan. Such valuation methodologies and fair value
hierarchy classifications are further discussed in the
Mortgage-Related and Non-Mortgage-Related
Securities and the Mortgage Loans,
Held-for-Sale sections above.
Guarantee
Asset, at Fair Value
For a description of how we determine the fair value of our
guarantee asset, see NOTE 2: FINANCIAL GUARANTEES AND
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS. Since
its valuation technique is model based with significant inputs
that are not observable, our guarantee asset is classified as
Level 3 in the fair value hierarchy.
REO,
Net
For GAAP purposes, REO is subsequently carried at the lower of
its carrying amount or fair value less cost to sell. The
subsequent fair value less cost to sell is an estimated value
based on relevant historical factors, which are considered to be
unobservable inputs. REO is classified as Level 3 under the
fair value hierarchy.
Debt
Securities Denominated in Foreign Currencies
Foreign-currency denominated debt instruments are measured at
fair value pursuant to our fair value option election. We
determine the fair value of these instruments by obtaining
multiple quotes from dealers. Since the prices provided by the
dealers consider only observable data such as interest rates and
exchange rates, these fair values are classified as Level 2
under the fair value hierarchy.
Derivative
Liabilities, Net
See discussion under Derivative Assets, Net
above.
Consolidated
Fair Value Balance Sheets
The supplemental consolidated fair value balance sheets in
Table 14.4 present our estimates of the fair value of our
recorded financial assets and liabilities and off-balance sheet
financial instruments at June 30, 2008 and
December 31, 2007. Our consolidated fair value balance
sheets include the estimated fair values of financial
instruments recorded on our consolidated balance sheets prepared
in accordance with GAAP, as well as off-balance sheet financial
instruments that represent our assets or liabilities that are
not recorded on our GAAP consolidated balance sheets. These
off-balance sheet items predominantly consist of: (a) the
unrecognized guarantee asset and guarantee obligation associated
with our PCs issued through our guarantor swap program prior to
the implementation of FIN 45, (b) certain commitments
to purchase mortgage loans and (c) certain credit
enhancements on manufactured housing asset-backed securities.
The fair value balance sheets also include certain assets and
liabilities that are not financial instruments (such as property
and equipment and real estate owned, which are included in other
assets) at their carrying value in accordance with GAAP. The
valuations of financial instruments on our consolidated fair
value balance sheets are in accordance with GAAP fair value
guidelines prescribed by SFAS 107, Disclosures
about Fair Value of Financial Instruments, and other
relevant pronouncements.
During the six months ended June 30, 2008, our fair value
results were impacted by several changes in our approach for
estimating the fair value of certain financial instruments,
primarily related to our valuation of our guarantee obligation
as a result of the adoption of SFAS 157 on January 1,
2008 and other improvements to our methodology during the first
and second quarters of 2008. These changes resulted in a net
increase of approximately $4.6 billion (after-tax) in the
fair value of total net assets at March 31, 2008 in
addition to a net reduction of $1.2 billion (after-tax) in
the fair value of total net assets at June 30, 2008. For a
further discussion of our adoption of SFAS 157 and
information concerning our valuation approach related to our
guarantee obligation, see NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Change in Accounting
Principles and Valuation Methods and Assumptions Not
Subject to Fair Value Hierarchy Guarantee
Obligation.
Table 14.4
Consolidated Fair Value Balance
Sheets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount(2)
|
|
|
Fair Value
|
|
|
Amount(2)
|
|
|
Fair Value
|
|
|
|
(in billions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
89.1
|
|
|
$
|
84.1
|
|
|
$
|
80.0
|
|
|
$
|
76.8
|
|
Mortgage-related securities
|
|
|
671.8
|
|
|
|
671.8
|
|
|
|
629.8
|
|
|
|
629.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio
|
|
|
760.9
|
|
|
|
755.9
|
|
|
|
709.8
|
|
|
|
706.6
|
|
Cash and cash equivalents
|
|
|
43.6
|
|
|
|
43.6
|
|
|
|
8.6
|
|
|
|
8.6
|
|
Non-mortgage-related securities
|
|
|
12.9
|
|
|
|
12.9
|
|
|
|
35.1
|
|
|
|
35.1
|
|
Securities purchased under agreements to resell and federal
funds sold
|
|
|
15.3
|
|
|
|
15.3
|
|
|
|
6.6
|
|
|
|
6.6
|
|
Derivative assets, net
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Guarantee
asset(3)
|
|
|
11.0
|
|
|
|
11.8
|
|
|
|
9.6
|
|
|
|
10.4
|
|
Other
assets(4)
|
|
|
34.9
|
|
|
|
44.3
|
|
|
|
23.9
|
|
|
|
31.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
879.0
|
|
|
$
|
884.2
|
|
|
$
|
794.4
|
|
|
$
|
799.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities, net
|
|
$
|
835.8
|
|
|
$
|
842.7
|
|
|
$
|
738.6
|
|
|
$
|
749.3
|
|
Guarantee obligation
|
|
|
14.0
|
|
|
|
36.6
|
|
|
|
13.7
|
|
|
|
26.2
|
|
Derivative liabilities, net
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Reserve for guarantee losses on PCs
|
|
|
5.3
|
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
Other liabilities
|
|
|
10.0
|
|
|
|
9.5
|
|
|
|
12.0
|
|
|
|
11.0
|
|
Minority interests in consolidated subsidiaries
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and minority interests
|
|
|
866.1
|
|
|
|
889.8
|
|
|
|
767.7
|
|
|
|
787.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets attributable to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stockholders
|
|
|
14.1
|
|
|
|
11.3
|
|
|
|
14.1
|
|
|
|
12.3
|
|
Common stockholders
|
|
|
(1.2
|
)
|
|
|
(16.9
|
)
|
|
|
12.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
|
12.9
|
|
|
|
(5.6
|
)
|
|
|
26.7
|
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interests and net assets
|
|
$
|
879.0
|
|
|
$
|
884.2
|
|
|
$
|
794.4
|
|
|
$
|
799.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The consolidated fair value balance
sheets do not purport to present our net realizable, liquidation
or market value as a whole. Furthermore, amounts we ultimately
realize from the disposition of assets or settlement of
liabilities may vary significantly from the fair values
presented.
|
(2)
|
Equals the amount reported on our
GAAP consolidated balance sheets.
|
(3)
|
The fair value of our guarantee
asset reported exceeds the carrying value primarily because the
fair value includes our guarantee asset related to PCs that were
issued prior to the implementation of FIN 45 in 2003 and
thus are not recognized on our GAAP consolidated balance sheets.
|
(4)
|
Fair values include estimated
income taxes calculated using the 35% federal statutory rate on
the difference between the consolidated fair value balance
sheets net assets attributable to common stockholders, including
deferred taxes from our GAAP consolidated balance sheets, and
the GAAP consolidated balance sheets equity attributable to
common stockholders.
|
Limitations
Our consolidated fair value balance sheets do not capture all
elements of value that are implicit in our operations as a going
concern because our consolidated fair value balance sheets only
capture the values of the current investment and securitization
portfolios. For example, our consolidated fair value balance
sheets do not capture the value of new investment and
securitization business that would likely replace prepayments as
they occur. In addition, our consolidated fair value balance
sheets do not capture the value associated with future growth
opportunities in our investment and securitization portfolios.
Thus, the fair value of net assets attributable to stockholders
presented on our consolidated fair value balance sheets does not
represent an estimate of our net realizable, liquidation or
market value as a whole.
We report certain assets and liabilities that are not financial
instruments (such as property and equipment and real estate
owned), as well as certain financial instruments that are not
covered by the SFAS 107 disclosure requirements (such as
pension liabilities) at their carrying amounts in accordance
with GAAP on our consolidated fair value balance sheets. We
believe these items do not have a significant impact on our
overall fair value results. Other non-financial assets and
liabilities on our GAAP consolidated balance sheets represent
deferrals of costs and revenues that are amortized in accordance
with GAAP, such as deferred debt issuance costs and deferred
credit fees. Cash receipts and payments related to these items
are generally recognized in the fair value of net assets when
received or paid, with no basis reflected on our fair value
balance sheets.
Valuation
Methods and Assumptions Not Subject to Fair Value
Hierarchy
The following are valuation assumptions and methods for items
not subject to the fair value hierarchy either because they are
not measured at fair value other than on the fair value balance
sheet or are only measured at fair value at inception.
Mortgage
Loans
Mortgage loans represent single-family and multifamily mortgage
loans held in our retained portfolio. For GAAP purposes, we must
determine the fair value of these mortgage loans to calculate
lower-of-cost-or-fair-value adjustments for single-family
mortgages classified as held-for-sale. For fair value balance
sheet purposes, we use a similar approach when determining the
fair value of mortgage loans, including those
held-for-investment. The fair value of multifamily mortgage
loans is generally based on market prices obtained from reliable
third-party pricing service providers for similar mortgages,
adjusted for differences in contractual terms.
Cash
and Cash Equivalents
Cash and cash equivalents largely consists of highly liquid
investment securities with an original maturity of three months
or less used for cash management purposes, as well as cash
collateral posted by our derivative counterparties. Given that
these assets are short-term in nature with limited market value
volatility, the carrying amount on our GAAP consolidated balance
sheets is deemed to be a reasonable approximation of fair value.
Securities
Purchased Under Agreements to Resell and Federal Funds
Sold
Securities purchased under agreements to resell and federal
funds sold principally consists of short-term contractual
agreements such as reverse repurchase agreements involving
Treasury and agency securities, federal funds sold and
Eurodollar time deposits. Given that these assets are short-term
in nature, the carrying amount on our GAAP consolidated balance
sheets is deemed to be a reasonable approximation of fair value.
Other
Assets
Other assets consists of investments in qualified LIHTC
partnerships that are eligible for federal tax credits, credit
enhancement contracts related to PCs and Structured Securities
(pool insurance and recourse
and/or
indemnification agreements), financial guarantee contracts for
additional credit enhancements on certain manufactured housing
asset-backed securities, REO, property and equipment and other
miscellaneous assets.
Our investments in LIHTC partnerships, reported as consolidated
entities or equity method investments in the GAAP financial
statements, are not within the scope of SFAS 107 disclosure
requirements. However, we present the fair value of these
investments in other assets on our consolidated fair value
balance sheets. For the LIHTC partnerships, the fair value of
expected tax benefits is estimated using expected cash flows
discounted using our estimated cost of funds.
For the credit enhancement contracts related to PCs and
Structured Securities (pool insurance and recourse
and/or
indemnification agreements), fair value is estimated using an
expected cash flow approach, and is intended to reflect the
estimated amount that a third party would be willing to pay for
the contracts. On our consolidated fair value balance sheets,
these contracts are reported at fair value at each balance sheet
date based on current market conditions. On our GAAP
consolidated balance sheets, these contracts are initially
recorded at fair value at inception, then amortized to expense.
For the credit enhancements on manufactured housing asset-backed
securities, the fair value is based on the difference between
the market price of non-credit-impaired manufactured housing
securities and credit-impaired manufactured housing securities
that are likely to produce future credit losses, as adjusted for
our estimate of a risk premium attributable to the financial
guarantee contracts. The value of the contracts, over time, will
be determined by the actual credit-related losses incurred and,
therefore, may have a value that is higher or lower than our
market-based estimate. On our GAAP consolidated financial
statements, these contracts are recognized as cash is received.
The other categories of assets that comprise other assets are
not financial instruments required to be valued at fair value
under SFAS 107, such as property and equipment. For the
majority of these non-financial instruments in other assets, we
use the carrying amounts from our GAAP consolidated balance
sheets as the reported values on our consolidated fair value
balance sheets, without any adjustment. These assets represent
an insignificant portion of our GAAP consolidated balance
sheets. Certain non-financial assets in other assets on our GAAP
consolidated balance sheets are assigned a zero value on our
consolidated fair value balance sheets. This treatment is
applied to deferred items such as deferred debt issuance costs.
We adjust the GAAP-basis deferred taxes reflected on our
consolidated fair value balance sheets to include estimated
income taxes on the difference between our consolidated fair
value balance sheets net assets attributable to common
stockholders, including deferred taxes from our GAAP
consolidated balance sheets, and our GAAP consolidated balance
sheets equity attributable to common stockholders. To the extent
the adjusted deferred taxes are a net asset, this amount is
included in other assets. If the adjusted deferred taxes are a
net liability, this amount is included in other liabilities.
Total
Debt Securities, Net
Total debt securities, net represent short-term and long-term
debt used to finance our assets. On our consolidated GAAP
balance sheets, debt securities, excluding debt securities
denominated in foreign currencies, are reported at amortized
cost, which is net of deferred items, including premiums,
discounts and hedging-related basis adjustments. This item
includes both non-callable and callable debt, as well as
short-term zero-coupon discount notes. The fair value of the
short-term zero-coupon discount notes is based on a discounted
cash flow model with market inputs. The valuation of other debt
securities represents the proceeds that we would receive from
the issuance of debt and is generally based on market prices
obtained from broker/dealers, reliable third-party pricing
service providers or direct market observations. We elected the
fair value option for debt securities denominated in foreign
currencies and reported them at fair value on our GAAP
consolidated balance sheets effective January 1, 2008.
Guarantee
Obligation
We did not establish a guarantee obligation for GAAP purposes
for PCs and Structured Securities that were issued through our
guarantor swap program prior to adoption of FIN 45. In
addition, after it is initially recorded at fair value the
guarantee obligation is not subsequently carried at fair value
for GAAP purposes. On our consolidated fair value balance
sheets, the guarantee obligation reflects the fair value of our
guarantee obligation on all PCs regardless of when they were
issued. Additionally, for fair value balance sheet purposes, our
guarantee obligation is valued using a model that is calibrated
to entry pricing information to estimate the fair value on our
seasoned guarantee obligation. Entry pricing information used in
our model includes the spot delivery fee and management and
guarantee fee used to determine the amount charged to customers
for executing our new securitizations. For information
concerning our valuation approach and accounting policies
related to our guarantees of mortgage assets for GAAP purposes,
see NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES and NOTE 2: FINANCIAL GUARANTEES AND
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS.
Reserve
for Guarantee Losses on PCs
The carrying amount of the reserve for guarantee losses on PCs
on our GAAP consolidated balance sheets represents the
contingent losses contained in the loans that back our PCs. This
line item has no basis on our consolidated fair value balance
sheets, because the estimated fair value of all expected default
losses (both contingent and non-contingent) is included in the
guarantee obligation reported on our consolidated fair value
balance sheets.
Other
Liabilities
Other liabilities principally consist of funding liabilities
associated with investments in LIHTC partnerships, accrued
interest payable on debt securities and other miscellaneous
obligations of less than one year. We believe the carrying
amount of these liabilities is a reasonable approximation of
their fair value, except for funding liabilities associated with
investments in LIHTC partnerships, for which fair value is
estimated using expected cash flows discounted at a market-based
yield. Furthermore, certain deferred items reported as other
liabilities on our GAAP consolidated balance sheets are assigned
zero value on our consolidated fair value balance sheets, such
as deferred credit fees. Also, as discussed in Other
Assets, other liabilities may include a deferred tax
liability adjusted for fair value balance sheet purposes.
Minority
Interests in Consolidated Subsidiaries
Minority interests in consolidated subsidiaries primarily
represent preferred stock interests that third parties hold in
our two majority-owned real estate investment trust, or REIT
subsidiaries. In accordance with GAAP, we consolidated the
REITs. The preferred stock interests are not within the scope of
SFAS 107 disclosure requirements. However, we present the
fair value of these interests on our consolidated fair value
balance sheets. The fair value of the third-party minority
interests in these REITs was based on the estimated value of the
underlying REIT preferred stock we determined based on a
valuation model.
Net
Assets Attributable to Preferred Stockholders
To determine the preferred stock fair value, we use a
market-based approach incorporating quoted dealer prices.
Net
Assets Attributable to Common Stockholders
Net assets attributable to common stockholders is equal to the
difference between the fair value of total assets and the sum of
total liabilities and minority interests reported on our
consolidated fair value balance sheets, less the fair value of
net assets attributable to preferred stockholders.
NOTE 15:
CONCENTRATION OF CREDIT AND OTHER RISKS
Mortgages
and Mortgage-Related Securities
Our business activity is to participate in and support the
residential mortgage market in the United States, which we
pursue by both issuing guaranteed mortgage securities and
investing in mortgage loans and mortgage-related securities.
Table 15.1 summarizes the geographical concentration of
mortgages and mortgage-related securities that we held in our
retained portfolio or that are collateral for our PCs and
Structured Securities, excluding:
|
|
|
|
|
$1.1 billion and $1.3 billion of mortgage-related
securities issued by Ginnie Mae that back Structured Securities
at June 30, 2008 and December 31, 2007, respectively,
because these securities do not expose us to meaningful amounts
of credit risk;
|
|
|
|
$74.1 billion and $47.8 billion of agency
mortgage-related securities at June 30, 2008 and
December 31, 2007, respectively, because these securities
do not expose us to meaningful amounts of credit risk; and
|
|
|
|
$212.7 billion and $233.8 billion of non-agency
mortgage-related securities held in our retained portfolio at
June 30, 2008 and December 31, 2007, respectively,
because geographic information regarding these securities is not
available. With respect to these securities, we look to
third-party credit enhancements (e.g., bond insurance) or
other credit
|
|
|
|
|
|
enhancements resulting from the securitization structure
supporting such securities (e.g., subordination levels)
as a primary means of managing credit risk.
|
See NOTE 4: RETAINED PORTFOLIO AND CASH AND
INVESTMENTS PORTFOLIO for more information about the
securities we hold.
Table 15.1
Concentration of Credit Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Amount(1)
|
|
|
Percentage
|
|
|
Amount(1)
|
|
|
Percentage
|
|
|
|
(dollars in millions)
|
|
|
By
Region(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West
|
|
$
|
492,213
|
|
|
|
26
|
%
|
|
$
|
455,051
|
|
|
|
25
|
%
|
Northeast
|
|
|
467,661
|
|
|
|
24
|
|
|
|
443,813
|
|
|
|
24
|
|
North Central
|
|
|
360,703
|
|
|
|
19
|
|
|
|
353,522
|
|
|
|
19
|
|
Southeast
|
|
|
350,944
|
|
|
|
18
|
|
|
|
335,386
|
|
|
|
19
|
|
Southwest
|
|
|
242,155
|
|
|
|
13
|
|
|
|
231,951
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,913,676
|
|
|
|
100
|
%
|
|
$
|
1,819,723
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
265,813
|
|
|
|
14
|
%
|
|
$
|
243,225
|
|
|
|
13
|
%
|
Florida
|
|
|
129,455
|
|
|
|
7
|
|
|
|
124,092
|
|
|
|
7
|
|
Illinois
|
|
|
96,157
|
|
|
|
5
|
|
|
|
91,835
|
|
|
|
5
|
|
New York
|
|
|
95,686
|
|
|
|
5
|
|
|
|
90,686
|
|
|
|
5
|
|
Texas
|
|
|
95,062
|
|
|
|
5
|
|
|
|
91,130
|
|
|
|
5
|
|
All others
|
|
|
1,231,503
|
|
|
|
64
|
|
|
|
1,178,755
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,913,676
|
|
|
|
100
|
%
|
|
$
|
1,819,723
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Calculated as total mortgage
portfolio less Structured Securities backed by Ginnie Mae
Certificates and non-Freddie Mac mortgage-related securities
held in our retained portfolio.
|
(2)
|
Region designation: West (AK, AZ,
CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA,
ME, MD, NH, NJ, NY, PA, RI, VT, VA, WV); North Central (IL, IN,
IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC,
PR, SC, TN, VI); Southwest (AR, CO, KS, LA, MO, NE, NM, OK,
TX, WY).
|
Higher-Risk
Mortgage Loans
There are residential loan products originated in recent years
that are designed to offer borrowers greater choices in their
payment terms. For example, interest-only mortgages allow the
borrower to pay only interest for a fixed period of time before
the loan begins to amortize. Option ARM loans permit a variety
of repayment options, which include minimum, interest-only,
fully amortizing
30-year and
fully amortizing
15-year
payments. The minimum payment alternative for option ARM loans
allows the borrower to make monthly payments that may be less
than the interest accrued for the period. The unpaid interest,
known as negative amortization, is added to the principal
balance of the loan, which increases the outstanding loan
balance. At both June 30, 2008 and December 31, 2007,
interest-only and option ARM loans collectively represented
approximately 10% of loans underlying our single-family issued
guaranteed PCs and Structured Securities.
In addition to these products, there are also types of
residential mortgage loans originated in the market with lower
or alternative documentation requirements than full
documentation mortgage loans. These reduced documentation
mortgages have been categorized in the mortgage industry as
Alt-A loans.
We have classified mortgage loans as
Alt-A if the
lender that delivers them to us has classified the loans as
Alt-A, or if
the loans had reduced documentation requirements that indicate
that the loans should be classified as
Alt-A. At
June 30, 2008 and December 31, 2007, approximately 10%
and 11% of our single-family PCs and Structured Securities were
backed by
Alt-A
mortgage loans, respectively.
Mortgage
Lenders and Insurers
A significant portion of our single-family mortgage purchase
volume is generated from several key mortgage lenders with whom
we have entered into business arrangements. These arrangements
generally involve a lenders commitment to sell a
significant proportion of its conforming mortgage origination
volume to us. During the six months ended June 30, 2008,
three mortgage lenders, Wells Fargo Bank, N.A., Countrywide Home
Loans, Inc. and Bank of America, N.A., each accounted for 10% or
more of our mortgage purchase volume, and collectively accounted
for approximately 43% of our total mortgage purchase volume. In
July 2008, Bank of America Corporation completed its acquisition
of Countrywide Financial Corp., and together these
companies subsidiaries accounted for 24% of our mortgage
purchase volume in the six months ended June 30, 2008.
During the six months ended June 30, 2008, our top four
multifamily lenders each accounted for more than 10% of our
mortgage purchase volume, and represented approximately 57% of
our multifamily purchase volume. These top lenders are among the
largest mortgage loan originators in the U.S. in the
single-family and multifamily markets, respectively. We are
exposed to the risk that we could lose purchase volume to the
extent these arrangements are terminated or modified without
replacement from other lenders. In July 2008, IndyMac Bancorp,
Inc. announced that the Federal Deposit Insurance Corporation
had been made a conservator of the bank. IndyMacs lending
division accounted for 0.4% of our mortgage purchase volume for
the six months ended June 30, 2008.
We have institutional credit risk relating to the potential
insolvency or non-performance of mortgage insurers that insure
mortgages we purchase or guarantee. At June 30, 2008, these
insurers provided coverage, with maximum loss coverage of
$65 billion, for $338 billion of unpaid principal
balances in connection with our single-family mortgage
portfolio, excluding those backing Structured Transactions.
Excluding bond insurers, which provide loss insurance for our
non-agency mortgage-related securities portfolio, our top five
mortgage insurer counterparties, Mortgage Guaranty Insurance
Corporation (or MGIC), Radian Guaranty Inc. (or Radian),
Genworth Mortgage Insurance Corporation, PMI Mortgage Insurance
Co. (or PMI), and United Guaranty Residential Insurance Co.,
each accounted for more than 10% of our maximum exposure to
mortgage insurers at June 30, 2008. Recently, many mortgage
insurers have had financial difficulty and have received several
downgrades in their credit rating by nationally recognized
statistical rating organizations. Triad Guaranty Insurance
Corporation (or Triad), one of our mortgage insurance
counterparties, announced that it ceased issuing new insurance
effective July 15, 2008. In accordance with our insurer
eligibility requirements, we suspended our rating of Triad as a
Type-I, approved insurer on May 14, 2008, subsequently
denied Triads appeal of our suspension and on
June 19, 2008 informed our customers that mortgages with
commitments of insurance from Triad dated after July 14,
2008 are not eligible for sale to us. We reviewed the
remediation plans of MGIC, Radian and PMI which were submitted
to us after their downgrades below the AA rating category, and
we have not changed their current eligibility status under our
guidelines. Republic Mortgage Insurance Company (or RMIC),
another of our mortgage insurance counterparties, was downgraded
below the AA category on June 27, 2008 and will submit a
remediation plan for our review. To date, no mortgage insurer
has failed to meet its obligations to us.
We also obtain bond insurance as an additional credit
enhancement with either primary or secondary policies to cover
non-agency securities held in either our retained or
non-mortgage investment portfolio. At June 30, 2008, we had
coverage, including secondary policies on securities, totaling
$17 billion of unpaid principal balance. At June 30,
2008, the top four of our bond insurers, Ambac Assurance
Corporation, Financial Guaranty Insurance Company, Financial
Security Assurance Inc., and MBIA Insurance Corp., each
accounted for more than 10% of our overall bond insurance
coverage and collectively represented approximately 91% of our
total coverage. Two of our bond insurers have had their credit
rating downgraded below investment grade by at least one major
rating agency.
Based upon currently available information, we expect that most
of our mortgage and bond insurance counterparties possess
adequate financial strength and capital to meet their
obligations to us for the near term. For our exposure to
mortgage insurers, we evaluate the recovery from insurance
policies for mortgage loans in our retained portfolio as well as
loans underlying our PCs and Structured Securities as part of
the estimate of our loan loss reserves. As of June 30,
2008, downgrades of financial strength ratings and our
evaluation of the insurers remediation plans did not
affect our recorded loan loss reserves. We evaluate the recovery
from monoline bond insurance policies as part of our impairment
analysis for our investments in securities. We recognized
impairment on certain of these securities during the second
quarter of 2008. If a monoline bond insurer fails to meet its
obligations to us with respect to the securities for which we
have obtained insurance, it could reduce the fair values of our
securities and result in additional financial losses to us,
which could have a material adverse effect on our earnings,
financial condition and capital position. To date, none of our
bond insurers has failed to meet its obligations to us.
Derivative
Portfolio
On an ongoing basis, we review the credit fundamentals of all of
our derivative counterparties to confirm that they continue to
meet our internal standards. We assign internal ratings, credit
capital and exposure limits to each counterparty based on
quantitative and qualitative analysis, which we update and
monitor on a regular basis. We conduct additional reviews when
market conditions dictate or events affecting an individual
counterparty occur. Three of our counterparties each accounted
for greater than 10% and collectively accounted for 89% of our
net uncollateralized exposure, excluding commitments, to
derivatives counterparties at June 30, 2008. These
counterparties included Bank of America, N.A., Barclays Bank PLC
and Lehman Brothers Special Financing, Inc., whose parent
company is Lehman Brothers Holdings, Inc., and were rated AA+,
AA and A, respectively, at August 1, 2008.
NOTE 16:
SEGMENT REPORTING
Effective December 1, 2007, management determined that our
operations consist of three reportable segments. As discussed
below, we use Segment Earnings to measure and assess the
financial performance of our segments. Segment Earnings is
calculated for the segments by adjusting GAAP net income (loss)
for certain investment-related activities and credit
guarantee-related activities. The Segment Earnings measure is
provided to the chief operating decision maker. Prior to
December 1, 2007, we reported as a single segment using
GAAP-basis income. We have revised the financial information and
disclosures for prior periods to reflect the segment disclosures
as if they had been in effect throughout all periods reported.
We conduct our operations solely in the U.S. and its
territories. Therefore, we do not generate any revenue from
geographic locations outside of the U.S. and its
territories.
Segments
Our business operations include three reportable segments, which
are based on the type of business activities each
performs Investments, Single-family Guarantee and
Multifamily. Certain activities that are not part of a segment
are included in the All Other category, which primarily includes
certain unallocated corporate items, such as costs associated
with remediating our internal controls and near-term
restructuring costs, costs related to the resolution of certain
legal matters and certain income tax items. We evaluate our
performance and allocate resources based on Segment Earnings,
which we describe and present in this note. We do not consider
our assets by segment when making these evaluations or
allocations.
Investments
In this segment, we invest principally in mortgage-related
securities and single-family mortgage loans through our
mortgage-related investment portfolio. Segment Earnings consists
primarily of the returns on these investments, less the related
financing costs and administrative expenses. Within this
segment, our activities may include the purchase of mortgage
loans and mortgage-related securities with less attractive
investment returns and with high incremental risk in order to
achieve our affordable housing goals and subgoals. We maintain a
cash and a non-mortgage-related securities investment portfolio
in this segment to help manage our liquidity. We finance these
activities primarily through issuances of short- and long-term
debt in the public markets. Results also include derivative
transactions we enter into to help manage interest-rate and
other market risks associated with our debt financing and
mortgage-related investment portfolio.
Single-Family
Guarantee
In this segment, we guarantee the payment of principal and
interest on single-family mortgage-related securities, including
those held in our retained portfolio, in exchange for management
and guarantee fees received over time and other up-front
compensation. Earnings for this segment consist of management
and guarantee fee revenues and trust management income less the
related credit costs (i.e., provision for credit losses)
and operating expenses. Also included is the interest earned on
assets held in our Investments segment related to single-family
guarantee activities, net of allocated funding costs.
Multifamily
In this segment, we purchase multifamily mortgages for our
retained portfolio and guarantee the payment of principal and
interest on multifamily mortgage-related securities and
mortgages underlying multifamily housing revenue bonds. These
activities support our mission to supply financing for
affordable rental housing. This segment includes certain equity
investments in various limited partnerships that sponsor low-
and moderate-income multifamily rental apartments, which benefit
from LIHTCs. Also included is the interest earned on assets held
in our Investments segment related to multifamily guarantee
activities, net of allocated funding costs.
All
Other
All Other includes corporate-level expenses not allocated to any
of our reportable segments such as costs associated with
remediating our internal controls and near-term restructuring as
well as costs related to the resolution of certain legal matters
and certain income tax items.
Segment
Allocations
Results of each reportable segment include directly attributable
revenues and expenses. Administrative expenses that are not
directly attributable to a segment are allocated ratably using
alternative, quantifiable measures such as headcount
distribution or segment usage if considered semi-direct or on a
pre-determined basis if considered indirect. Expenses not
allocated to segments consist primarily of costs associated with
remediating our internal controls and near-term restructuring
costs and are included in the All Other category. Net interest
income for each segment includes an allocation related to
investments and debt based on each segments assets and
off-balance sheet obligations. The LIHTC partnerships tax
benefit is allocated to the Multifamily segment. All remaining
taxes are calculated based on a 35% federal statutory rate as
applied to Segment Earnings.
Segment
Earnings
In managing our business, we present the operating performance
of our segments using Segment Earnings. Segment Earnings differs
significantly from and should not be used as a substitute for
GAAP net income (loss) before cumulative effect of change in
accounting principle or net income (loss) as determined in
accordance with GAAP. There are important limitations to using
Segment Earnings as a measure of our financial performance.
Among them, our regulatory capital requirements are based on our
GAAP results. Segment Earnings adjusts for the effects of
certain gains and losses and mark-to-fair-value items which,
depending on market circumstances, can significantly affect,
positively or negatively, our GAAP results and which, in recent
periods, have caused us to record GAAP net losses. GAAP net
losses will adversely impact our regulatory capital, regardless
of results reflected in Segment Earnings. Also, our definition
of Segment Earnings may differ from similar measures used by
other companies. However, we believe that the presentation of
Segment Earnings highlights
the results from ongoing operations and the underlying results
of the segments in a manner that is useful to the way we manage
and evaluate the performance of our business.
Segment Earnings present our results on an accrual basis as the
cash flows from our segments are earned over time. The objective
of Segment Earnings is to present our results in a manner more
consistent with our business models. The business model for our
investment activity is one where we generally buy and hold our
investments in mortgage-related assets for the long term, fund
our investments with debt and use derivatives to minimize
interest rate risk and generate net interest income in line with
our return on equity objectives. We believe it is meaningful to
measure the performance of our investment business using
long-term returns, not short-term value. The business model for
our credit guarantee activity is one where we are a long-term
guarantor in the conforming mortgage markets, manage credit risk
and generate guarantee and credit fees, net of incurred credit
losses. As a result of these business models, we believe that
this accrual-based metric is a meaningful way to present our
results as actual cash flows are realized, net of credit losses
and impairments. We believe Segment Earnings provides us with a
view of our financial results that is more consistent with our
business objectives, which helps us better evaluate the
performance of our business, both from
period-to-period
and over the longer term.
As described below, Segment Earnings is calculated for the
segments by adjusting GAAP net income (loss) for certain
investment-related activities and credit guarantee-related
activities. Segment Earnings includes certain reclassifications
among income and expense categories that have no impact on net
income (loss) but provide us with a meaningful metric to assess
the performance of each segment and our company as a whole.
Investment
Activity-Related Adjustments
The most significant risk inherent in our investing activities
is interest-rate risk, including duration, convexity and
volatility. We actively manage these risks through asset
selection and structuring, financing asset purchases with a
broad range of both callable and non-callable debt and the use
of interest-rate derivatives, designed to economically hedge a
significant portion of our interest-rate exposure. Our
interest-rate derivatives include interest-rate swaps,
exchange-traded futures and both purchased and written options
(including swaptions). GAAP-basis earnings related to investment
activities of our Investments segment, and to a lesser extent,
our Multifamily segment, are subject to significant
period-to-period variability, which we believe is not
necessarily indicative of the risk management techniques that we
employ and the performance of these segments.
Our derivative instruments not in hedge accounting relationships
are adjusted to fair value under GAAP with resulting gains or
losses recorded in GAAP-basis income. Certain other assets are
also adjusted to fair value under GAAP with resulting gains or
losses recorded in GAAP-basis income. These assets consist
primarily of mortgage-related securities classified as trading
and mortgage-related securities classified as available-for-sale
when a decline in fair value of available-for-sale securities is
deemed to be other than temporary.
To help us assess the performance of our investment-related
activities, we make the following adjustments to earnings as
determined under GAAP. We believe this measure of performance,
which we call Segment Earnings, enhances the understanding of
operating performance for specific periods, as well as trends in
results over multiple periods, as this measure is consistent
with assessing our performance against our investment objectives
and the related risk-management activities.
|
|
|
|
|
Derivative and foreign-currency denominated debt-related
adjustments:
|
|
|
|
|
|
Fair value adjustments on derivative positions, recorded
pursuant to GAAP, are not recognized in Segment Earnings as
these positions economically hedge our investment activities.
|
|
|
|
Payments or receipts to terminate derivative positions are
amortized prospectively into Segment Earnings on a straight-line
basis over the associated term of the derivative instrument.
|
|
|
|
Payments of up-front premiums (e.g., payments made to
third parties related to purchased swaptions) are amortized
prospectively on a straight-line basis into Segment Earnings
over the contractual life of the instrument. The up-front
payments, primarily for option premiums, are amortized to
reflect the periodic cost associated with the protection
provided by the option contract.
|
|
|
|
Foreign-currency translation gains and losses as well as the
unrealized fair value adjustments associated with
foreign-currency denominated debt along with the
foreign-currency derivatives gains and losses are excluded from
Segment Earnings because the fair value adjustments on the
foreign-currency swaps that we use to manage foreign-currency
exposure are also excluded through the fair value adjustment on
derivative positions as described above as the foreign-currency
exposure is economically hedged.
|
|
|
|
|
|
Investment sales, debt retirements and fair value-related
adjustments:
|
|
|
|
|
|
Gains and losses on investment sales and debt retirements that
are recognized at the time of the transaction pursuant to GAAP
are not immediately recognized in Segment Earnings. Gains and
losses on securities sold out of our retained portfolio and cash
and investments portfolio are amortized prospectively into
Segment Earnings on a
|
|
|
|
|
|
straight-line basis over five years and three years,
respectively. Gains and losses on debt retirements are amortized
prospectively into Segment Earnings on a straight-line basis
over the original terms of the repurchased debt.
|
|
|
|
|
|
Trading losses or impairments that reflect expected or realized
credit principal losses are realized immediately pursuant to
GAAP and in Segment Earnings since they are not economically
hedged. Fair value adjustments to trading securities related to
investments that are economically hedged are not included in
Segment Earnings. Similarly, non-credit related security
impairment losses are not included in Segment Earnings. These
non-credit related security impairments are deferred and
amortized prospectively into Segment Earnings on a straight-line
basis over five years for securities in our retained portfolio
and over three years for securities in our cash and investments
portfolio. GAAP-basis accretion income that may result from
impairment adjustments is also not included in Segment Earnings.
|
|
|
|
|
|
Fully taxable-equivalent adjustment:
|
|
|
|
|
|
Interest income generated from tax-exempt investments is
adjusted in Segment Earnings to reflect its equivalent yield on
a fully taxable basis.
|
We fund our investment assets with debt and derivatives to
manage interest-rate risk as evidenced by our Portfolio Market
Value Sensitivity, or PMVS, and duration gap metrics. As a
result, in situations where we record gains and losses on
derivatives, securities or debt buybacks, these gains and losses
are offset by economic hedges that we do not mark-to-fair-value
for GAAP purposes. For example, when we realize a gain on the
sale of a security, the debt which is funding the security has
an embedded loss that is not recognized under GAAP, but instead
over time as we realize the interest expense on the debt. As a
result, in Segment Earnings, we defer and amortize the security
gain to interest income to match the interest expense on the
debt that funded the asset. Because of our risk management
strategies, we believe that amortizing gains or losses on
economically hedged positions in the same periods as the
offsetting gains or losses is a meaningful way to assess
performance of our investment activities.
We believe it is useful to measure our performance using
long-term returns, not on a short-term fair value basis. Fair
value fluctuations in the short-term are not an accurate
indication of long-term returns. In calculating Segment
Earnings, we make adjustments to our GAAP-basis results that are
designed to provide a more consistent view of our financial
results, which helps us better assess the performance of our
business segments, both from period-to-period and over the
longer term. The adjustments we make to present our Segment
Earnings are consistent with the financial objectives of our
investment activities and related hedging transactions and
provide us with a view of expected investment returns and
effectiveness of our risk management strategies that we believe
is useful in managing and evaluating our investment-related
activities. Although we seek to mitigate the interest-rate risk
inherent in our investment-related activities, our hedging and
portfolio management activities do not eliminate risk. We
believe that a relevant measure of performance should closely
reflect the economic impact of our risk management activities.
Thus, we amortize the impact of terminated derivatives, as well
as gains and losses on asset sales and debt retirements, into
Segment Earnings. Although our interest-rate risk and
asset/liability management processes ordinarily involve active
management of derivatives, asset sales and debt retirements, we
believe that Segment Earnings, although it differs significantly
from, and should not be used as a substitute for GAAP-basis
results, is indicative of the longer-term time horizon inherent
in our investment-related activities.
Credit
Guarantee Activity-Related Adjustments
Credit guarantee activities consist largely of our guarantee of
the payment of principal and interest on mortgages and
mortgage-related securities in exchange for management and
guarantee and other fees. Over the longer-term, earnings consist
almost entirely of our management and guarantee fee revenues,
which include management guarantee fees collected throughout the
life of the loan and up-front compensation received, trust
management fees less related credit costs (i.e.,
provision for credit losses) and operating expenses. Our measure
of Segment Earnings for these activities consists primarily of
these elements of revenue and expense. We believe this measure
is a relevant indicator of operating performance for specific
periods, as well as trends in results over multiple periods
because it more closely aligns with how we manage and evaluate
the performance of the credit guarantee business.
We purchase mortgages from sellers/servicers in order to
securitize and issue PCs and Structured Securities. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES for a discussion of the accounting treatment of
these transactions. In addition to the components of earnings
noted above, GAAP-basis earnings for these activities include
gains or losses upon the execution of such transactions,
subsequent fair value adjustments to the guarantee asset and
amortization of the guarantee obligation.
Our credit-guarantee activities also include the purchase of
significantly past due mortgage loans from loan pools that
underlie our guarantees. Pursuant to GAAP, at the time of our
purchase the loans are recorded at fair value. To the extent the
adjustment of a purchased loan to fair value exceeds our own
estimate of the losses we will ultimately realize on the loan,
as reflected in our loan loss reserve, an additional loss is
recorded in our GAAP-basis results.
When we determine Segment Earnings for our credit
guarantee-related activities, the adjustments we apply to
earnings computed on a GAAP-basis include the following:
|
|
|
|
|
Amortization and valuation adjustments pertaining to the
guarantee asset and guarantee obligation are excluded from
Segment Earnings. Cash compensation exchanged at the time of
securitization, excluding
buy-up and
buy-down fees, is amortized into earnings.
|
|
|
|
The initial recognition of gains and losses recorded prior to
January 1, 2008 and in connection with the execution of
either securitization transactions that qualify as sales or
guarantor swap transactions, such as losses on certain credit
guarantees, is excluded from Segment Earnings.
|
|
|
|
Fair value adjustments recorded upon the purchase of delinquent
loans from pools that underlie our guarantees are excluded from
Segment Earnings. However, for Segment Earnings reporting, our
GAAP-basis loan loss provision is adjusted to reflect our own
estimate of the losses we will ultimately realize on such items.
|
While both GAAP-basis results and Segment Earnings reflect a
provision for credit losses determined in accordance with
SFAS 5, GAAP-basis results also include, as noted above,
measures of future cash flows (the guarantee asset) that are
recorded at fair value and, therefore, are subject to
significant adjustment from period-to-period as market
conditions, such as interest rates, change. Over the
longer-term, Segment Earnings and GAAP-basis income both capture
the aggregate cash flows associated with our guarantee-related
activities. Although Segment Earnings differs significantly
from, and should not be used as a substitute for GAAP-basis
income, we believe that excluding the impact of changes in the
fair value of expected future cash flows from our Segment
Earnings provides a meaningful measure of performance for a
given period as well as trends in performance over multiple
periods because it more closely aligns with how we manage and
evaluate the performance of our credit guarantee business.
Table 16.1 reconciles Segment Earnings (loss) to GAAP net
income (loss).
Table
16.1 Reconciliation of Segment Earnings (Loss) to
GAAP Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Segment Earnings (loss) after taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
793
|
|
|
$
|
571
|
|
|
$
|
906
|
|
|
$
|
1,085
|
|
Single-family Guarantee
|
|
|
(1,388
|
)
|
|
|
129
|
|
|
|
(1,846
|
)
|
|
|
353
|
|
Multifamily
|
|
|
118
|
|
|
|
84
|
|
|
|
216
|
|
|
|
209
|
|
All Other
|
|
|
144
|
|
|
|
(43
|
)
|
|
|
140
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
(333
|
)
|
|
|
741
|
|
|
|
(584
|
)
|
|
|
1,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
527
|
|
|
|
(471
|
)
|
|
|
(667
|
)
|
|
|
(1,553
|
)
|
Credit guarantee-related adjustments
|
|
|
1,818
|
|
|
|
831
|
|
|
|
1,644
|
|
|
|
329
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
(3,096
|
)
|
|
|
(379
|
)
|
|
|
(1,571
|
)
|
|
|
(310
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(105
|
)
|
|
|
(97
|
)
|
|
|
(215
|
)
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax adjustments
|
|
|
(856
|
)
|
|
|
(116
|
)
|
|
|
(809
|
)
|
|
|
(1,724
|
)
|
Tax-related adjustments
|
|
|
368
|
|
|
|
104
|
|
|
|
421
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(488
|
)
|
|
|
(12
|
)
|
|
|
(388
|
)
|
|
|
(992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss)
|
|
$
|
(821
|
)
|
|
$
|
729
|
|
|
$
|
(972
|
)
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 16.2 presents certain financial information for our
reportable segments and All Other.
Table 16.2
Segment Earnings and Reconciliation to
GAAP Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Net Interest
|
|
|
Management
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
|
Income
|
|
|
and Guarantee
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
|
(Expense)
|
|
|
Income
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Partnerships
|
|
|
Expense
|
|
|
Tax Benefit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
|
(in millions)
|
|
|
Investments
|
|
$
|
1,481
|
|
|
$
|
|
|
|
$
|
(125
|
)
|
|
$
|
(130
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
$
|
|
|
|
$
|
(426
|
)
|
|
$
|
793
|
|
Single-family Guarantee
|
|
|
58
|
|
|
|
840
|
|
|
|
103
|
|
|
|
(212
|
)
|
|
|
(2,630
|
)
|
|
|
(265
|
)
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
747
|
|
|
|
(1,388
|
)
|
Multifamily
|
|
|
98
|
|
|
|
17
|
|
|
|
7
|
|
|
|
(49
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
(108
|
)
|
|
|
(5
|
)
|
|
|
149
|
|
|
|
16
|
|
|
|
118
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
177
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
1,637
|
|
|
|
857
|
|
|
|
(18
|
)
|
|
|
(404
|
)
|
|
|
(2,637
|
)
|
|
|
(265
|
)
|
|
|
(108
|
)
|
|
|
(58
|
)
|
|
|
149
|
|
|
|
514
|
|
|
|
(333
|
)
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign- currency translation-related adjustments
|
|
|
(482
|
)
|
|
|
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527
|
|
Credit guarantee-related adjustments
|
|
|
14
|
|
|
|
(156
|
)
|
|
|
2,054
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
|
1,818
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
73
|
|
|
|
|
|
|
|
(3,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,096
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105
|
)
|
Reclassifications(1)
|
|
|
392
|
|
|
|
56
|
|
|
|
(469
|
)
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(108
|
)
|
|
|
(100
|
)
|
|
|
(575
|
)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
368
|
|
|
|
(488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statement of income
|
|
$
|
1,529
|
|
|
$
|
757
|
|
|
$
|
(593
|
)
|
|
$
|
(404
|
)
|
|
$
|
(2,537
|
)
|
|
$
|
(265
|
)
|
|
$
|
(108
|
)
|
|
$
|
(231
|
)
|
|
$
|
149
|
|
|
$
|
882
|
|
|
$
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Net Interest
|
|
|
Management
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
|
Income
|
|
|
and Guarantee
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
|
(Expense)
|
|
|
Income
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Partnerships
|
|
|
Expense
|
|
|
Tax Benefit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
1,780
|
|
|
$
|
|
|
|
$
|
(110
|
)
|
|
$
|
(261
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(16
|
)
|
|
$
|
|
|
|
$
|
(487
|
)
|
|
$
|
906
|
|
Single-family Guarantee
|
|
|
135
|
|
|
|
1,735
|
|
|
|
207
|
|
|
|
(416
|
)
|
|
|
(3,979
|
)
|
|
|
(473
|
)
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
993
|
|
|
|
(1,846
|
)
|
Multifamily
|
|
|
173
|
|
|
|
34
|
|
|
|
15
|
|
|
|
(98
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
(225
|
)
|
|
|
(9
|
)
|
|
|
298
|
|
|
|
44
|
|
|
|
216
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
185
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
2,088
|
|
|
|
1,769
|
|
|
|
113
|
|
|
|
(801
|
)
|
|
|
(3,995
|
)
|
|
|
(473
|
)
|
|
|
(225
|
)
|
|
|
(93
|
)
|
|
|
298
|
|
|
|
735
|
|
|
|
(584
|
)
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign- currency translation-related
adjustments.
|
|
|
(492
|
)
|
|
|
|
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(667
|
)
|
Credit guarantee-related adjustments
|
|
|
30
|
|
|
|
(317
|
)
|
|
|
2,058
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
(279
|
)
|
|
|
|
|
|
|
|
|
|
|
1,644
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
176
|
|
|
|
|
|
|
|
(1,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,571
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(215
|
)
|
Reclassifications(1)
|
|
|
740
|
|
|
|
94
|
|
|
|
(900
|
)
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
239
|
|
|
|
(223
|
)
|
|
|
(764
|
)
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
(279
|
)
|
|
|
|
|
|
|
421
|
|
|
|
(388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statement of income
|
|
$
|
2,327
|
|
|
$
|
1,546
|
|
|
$
|
(651
|
)
|
|
$
|
(801
|
)
|
|
$
|
(3,777
|
)
|
|
$
|
(473
|
)
|
|
$
|
(225
|
)
|
|
$
|
(372
|
)
|
|
$
|
298
|
|
|
$
|
1,156
|
|
|
$
|
(972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Net Interest
|
|
|
Management
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
|
Income
|
|
|
and Guarantee
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
|
(Expense)
|
|
|
Income
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Partnerships
|
|
|
Expense
|
|
|
Tax Benefit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
990
|
|
|
$
|
|
|
|
$
|
30
|
|
|
$
|
(133
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
|
|
|
$
|
(308
|
)
|
|
$
|
571
|
|
Single-family Guarantee
|
|
|
179
|
|
|
|
704
|
|
|
|
28
|
|
|
|
(209
|
)
|
|
|
(469
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
(69
|
)
|
|
|
129
|
|
Multifamily
|
|
|
94
|
|
|
|
16
|
|
|
|
5
|
|
|
|
(49
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(135
|
)
|
|
|
(8
|
)
|
|
|
135
|
|
|
|
27
|
|
|
|
84
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
17
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
1,263
|
|
|
|
720
|
|
|
|
62
|
|
|
|
(442
|
)
|
|
|
(470
|
)
|
|
|
(16
|
)
|
|
|
(135
|
)
|
|
|
(43
|
)
|
|
|
135
|
|
|
|
(333
|
)
|
|
|
741
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign- currency translation-related
adjustments.
|
|
|
(326
|
)
|
|
|
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(471
|
)
|
Credit guarantee-related
adjustments(2)
|
|
|
7
|
|
|
|
(135
|
)
|
|
|
1,380
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
831
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
54
|
|
|
|
|
|
|
|
(433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(379
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97
|
)
|
Reclassifications(1)(2)
|
|
|
(108
|
)
|
|
|
6
|
|
|
|
94
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(470
|
)
|
|
|
(129
|
)
|
|
|
896
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
(436
|
)
|
|
|
|
|
|
|
104
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statement of income
|
|
$
|
793
|
|
|
$
|
591
|
|
|
$
|
958
|
|
|
$
|
(442
|
)
|
|
$
|
(447
|
)
|
|
$
|
(16
|
)
|
|
$
|
(135
|
)
|
|
$
|
(479
|
)
|
|
$
|
135
|
|
|
$
|
(229
|
)
|
|
$
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Net Interest
|
|
|
Management
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
|
Income
|
|
|
and Guarantee
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
|
(Expense)
|
|
|
Income
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Partnerships
|
|
|
Expense
|
|
|
Tax Benefit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
1,892
|
|
|
$
|
|
|
|
$
|
54
|
|
|
$
|
(261
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(15
|
)
|
|
$
|
|
|
|
$
|
(585
|
)
|
|
$
|
1,085
|
|
Single-family Guarantee
|
|
|
347
|
|
|
|
1,381
|
|
|
|
50
|
|
|
|
(408
|
)
|
|
|
(758
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
(189
|
)
|
|
|
353
|
|
Multifamily
|
|
|
217
|
|
|
|
30
|
|
|
|
9
|
|
|
|
(94
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
(243
|
)
|
|
|
(12
|
)
|
|
|
273
|
|
|
|
33
|
|
|
|
209
|
|
All Other
|
|
|
(1
|
)
|
|
|
|
|
|
|
2
|
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
39
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
2,455
|
|
|
|
1,411
|
|
|
|
115
|
|
|
|
(845
|
)
|
|
|
(762
|
)
|
|
|
(30
|
)
|
|
|
(243
|
)
|
|
|
(84
|
)
|
|
|
273
|
|
|
|
(702
|
)
|
|
|
1,588
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign- currency translation-related adjustments
|
|
|
(649
|
)
|
|
|
|
|
|
|
(904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,553
|
)
|
Credit guarantee-related
adjustments(2)
|
|
|
13
|
|
|
|
(199
|
)
|
|
|
1,333
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
(846
|
)
|
|
|
|
|
|
|
|
|
|
|
329
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
114
|
|
|
|
|
|
|
|
(424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(310
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190
|
)
|
Reclassifications(1)(2)
|
|
|
(179
|
)
|
|
|
7
|
|
|
|
133
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
732
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(891
|
)
|
|
|
(192
|
)
|
|
|
138
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
(846
|
)
|
|
|
|
|
|
|
732
|
|
|
|
(992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statement of income
|
|
$
|
1,564
|
|
|
$
|
1,219
|
|
|
$
|
253
|
|
|
$
|
(845
|
)
|
|
$
|
(695
|
)
|
|
$
|
(30
|
)
|
|
$
|
(243
|
)
|
|
$
|
(930
|
)
|
|
$
|
273
|
|
|
$
|
30
|
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Include the reclassification of:
(a) the accrual of periodic cash settlements of all
derivatives not in qualifying hedge accounting relationships
from other non-interest income (loss) to net interest income
(expense) within our Investments segment; (b) implied
management and guarantee fees from net interest income (expense)
to other non-interest income (loss) within our Single-family
Guarantee and Multifamily segments; (c) net
buy-up and
buy-down fees from management and guarantee income to net
interest income (expense) within the Investments segment;
(d) interest income foregone on impaired loans from net
interest income (expense) to provision for credit losses within
our Single-family Guarantee segment; and (e) certain hedged
interest benefit (cost) amounts related to trust management
income from other non-interest income (loss) to net interest
income (expense) within our Investments segment.
|
(2)
|
Certain prior period amounts within
net interest income previously reported as a component of credit
guarantee-related adjustments have been reclassified to
reclassifications to conform to the current period presentation.
|
NOTE 17:
EARNINGS (LOSS) PER SHARE
We have participating securities related to options with
dividend equivalent rights that receive dividends as declared on
an equal basis with common shares, but are not obligated to
participate in undistributed net losses. Consequently, in
accordance with
EITF 03-6,
Participating Securities and the Two-Class Method
under FASB Statement No. 128, we use the
two-class method of computing earnings per share.
Basic earnings per common share are computed by dividing net
income (loss) available per common share by weighted average
common shares outstanding basic for the period.
Diluted earnings (loss) per share are computed as net income
(loss) available to common stockholders divided by weighted
average common shares outstanding diluted for the
period, which considers the effect of dilutive common equivalent
shares outstanding. For periods with net income the effect of
dilutive common equivalent shares outstanding includes:
(a) the weighted average shares related to stock options
(including the Employee Stock Purchase Plan); and (b) the
weighted average of non-vested restricted shares and non-vested
restricted stock units. Such items are included in the
calculation of weighted average common shares
outstanding diluted during periods of net income,
when the assumed conversion of the share equivalents has a
dilutive effect. Such items are excluded from the weighted
average common shares outstanding basic.
Table
17.1 Earnings (Loss) Per Common Share
Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars in millions,
|
|
|
|
except per share amounts)
|
|
|
Net income (loss)
|
|
$
|
(821
|
)
|
|
$
|
729
|
|
|
$
|
(972
|
)
|
|
$
|
596
|
|
Preferred stock dividends and issuance costs on redeemed
preferred stock
|
|
|
(231
|
)
|
|
|
(95
|
)
|
|
|
(503
|
)
|
|
|
(190
|
)
|
Amounts allocated to participating security option
holders(1)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available (applicable) to common
shareholders
basic(2)
|
|
$
|
(1,053
|
)
|
|
$
|
632
|
|
|
$
|
(1,476
|
)
|
|
$
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic (in
thousands)
|
|
|
646,868
|
|
|
|
652,877
|
|
|
|
646,603
|
|
|
|
657,103
|
|
Dilutive potential common shares (in thousands)
|
|
|
|
|
|
|
2,907
|
|
|
|
|
|
|
|
2,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
(in thousands)
|
|
|
646,868
|
|
|
|
655,784
|
|
|
|
646,603
|
|
|
|
659,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(1.63
|
)
|
|
$
|
0.97
|
|
|
$
|
(2.28
|
)
|
|
$
|
0.62
|
|
Diluted earnings (loss) per common share
|
|
$
|
(1.63
|
)
|
|
$
|
0.96
|
|
|
$
|
(2.28
|
)
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive potential common shares excluded from the
computation of dilutive potential common shares (in thousands)
|
|
|
11,933
|
|
|
|
2,024
|
|
|
|
10,265
|
|
|
|
3,050
|
|
|
|
(1)
|
Represents distributed earnings
during periods of net losses.
|
(2)
|
Includes distributed and
undistributed earnings to common shareholders.
|
NOTE 18:
SUBSEQUENT EVENTS
Since mid-June 2008, there has been a substantial decline in the
market price of our common stock. The market conditions that
have contributed to this price decline are likely to affect our
approach to raising new core capital including the timing,
amount, type and mix of securities we may issue. We have
committed to OFHEO to raise $5.5 billion of new capital. We
remain committed to raising this capital given appropriate
market conditions and will evaluate raising capital beyond this
amount depending on our needs and as market conditions mandate.
Our financial performance for the second quarter, while
reflecting the challenges that face the industry, leaves us
capitalized at a level greater than the 20% mandatory target
capital surplus established by OFHEO and with a greater surplus
above the statutory minimum capital requirement. Given the
challenges facing the industry, we expect to take actions to
maintain our capital position above the mandatory target capital
surplus. Accordingly, subject to approval by our board of
directors, we currently expect to reduce the dividend on our
common stock in the third quarter of 2008 from $0.25 to $0.05 or
less per share and to pay the full dividends at contractual
rates on our preferred stock. In addition, we continue to review
and consider other alternatives for managing our capital
including issuing equity in amounts that could be substantial
and materially dilutive to our existing shareholders, reducing
or rebalancing risk, slowing purchases into our credit guarantee
portfolio and limiting the growth or reducing the size of our
retained portfolio by allowing the portfolio to run off
and/or by
selling securities classified as trading or carried at fair
value under SFAS 159 or available-for-sale securities that
are accretive to capital (i.e., fair value exceeds
amortized cost). We have retained and are working with financial
advisors and we continue to engage in discussions with OFHEO and
the U.S. Department of the Treasury, or Treasury, on these
matters.
Our liquidity position remains strong as a result
of: (a) our continued access to the debt markets at
attractive spreads, (b) our cash and investments portfolio
of approximately $70 billion and (c) an unencumbered
agency mortgage-related securities portfolio of approximately
$470 billion, which could serve as collateral for
additional borrowings. Under stressful market conditions,
counterparties willing to provide funding based on our
unencumbered portfolio may be unavailable or may offer terms
that are not attractive to the company. On July 13, 2008,
the Board of Governors of the Federal Reserve System, or the
Federal Reserve, granted the Federal Reserve Bank of New York
the authority to lend to Freddie Mac if
necessary. Any such lending would be at the discount rate
charged for primary credit, or the primary credit rate, and
collateralized by U.S. government and federal agency
securities. This authorization was intended to supplement the
Treasurys existing authority to purchase obligations of
Freddie Mac.
The Housing and Economic Recovery Act of 2008 was signed into
law on July 30, 2008. Division A of this legislation,
the Federal Housing Finance Regulatory Reform Act of 2008, or
the Regulatory Reform Act, establishes a new regulator for us,
the Federal Housing Finance Agency, or FHFA, with enhanced
regulatory authorities relating, among other things, to our
minimum and risk-based capital levels and our business
activities, including portfolio investments, new products,
management and operations standards, affordable housing goals,
and executive compensation. The Regulatory Reform Act expands
the circumstances under which we could be placed into
conservatorship and also authorizes the FHFA to place us into
receivership under specified circumstances. The Regulatory
Reform Act also requires us to allocate or transfer certain
amounts to: (a) the Secretary of Housing and Urban
Development, or HUD, to fund a Housing Trust Fund, and
(b) a Capital Magnet Fund administered by the Secretary of
the Treasury. In addition, the Regulatory Reform Act provides
the Secretary of the Treasury with temporary authority, until
December 31, 2009, to purchase any obligations and other
securities we issue under certain circumstances.
PART
II OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
We are involved as a party to a variety of legal proceedings
arising from time to time in the ordinary course of business.
See NOTE 11: LEGAL CONTINGENCIES to our
consolidated financial statements for more information regarding
our involvement as a party to various legal proceedings.
ITEM 1A.
RISK FACTORS
This
Form 10-Q
should be read together with the ITEM 1A. RISK
FACTORS section in our Registration Statement, which
describes various risks and uncertainties to which we are or may
become subject, and is supplemented by the discussion below.
These risks and uncertainties could, directly or indirectly,
adversely affect our business, financial condition, results of
operations, cash flows, strategies and/or prospects.
The
value of mortgage-related securities guaranteed by us and held
in our retained portfolio may decline if we did not or were
unable to perform under our guarantee or if investor confidence
in our ability to perform under our guarantee were to
diminish.
We classify the mortgage-related securities in our retained
portfolio as either
available-for-sale
or trading, and account for them at fair value on our
consolidated balance sheets. A substantial portion of the
mortgage-related securities in our retained portfolio is
securities guaranteed by us. Our valuation of these securities
is consistent with GAAP and the legal structure of the guarantee
transaction, which includes the Freddie Mac guarantee to the
securitization trust. The valuation of our guaranteed mortgage
securities necessarily reflects investor confidence in our
ability to perform under our guarantee and the liquidity that
our guarantee provides. If we did not or were unable to perform
under our guarantee, or if investor confidence in our ability to
perform under our guarantee were to diminish, the value of our
guaranteed securities may decline, thereby reducing the value of
the securities reported on our consolidated balance sheets and
our ability to sell or otherwise use these securities for
liquidity purposes, and adversely affecting our financial
condition and results of operations.
Market
uncertainty and volatility may adversely affect our business,
profitability and results of operations.
The mortgage credit markets experienced difficult conditions and
volatility during 2007 which have continued in 2008. These
deteriorating conditions in the mortgage market resulted in a
decrease in availability of corporate credit and liquidity
within the mortgage industry and have caused disruptions to
normal operations of major mortgage originators, including some
of our largest customers. These conditions resulted in less
liquidity, greater volatility, widening of credit spreads and a
lack of price transparency. We operate in these markets and are
subject to potential adverse effects on our results of
operations and financial position due to our activities
involving securities, mortgages, derivatives and other mortgage
commitments with our customers.
In addition, we use market-based information as inputs to our
models, which are used to make operational decisions as well as
derive estimates for use in our financial reporting processes.
The turmoil in the housing and credit markets creates additional
risk regarding the reliability of our models, particularly since
we may be required to make manual adjustments to our models in
response to rapid changes in economic conditions. This may
increase the risk that our models could produce unreliable
results, estimates that vary widely or prove to be inaccurate.
Developments
affecting our legislative and regulatory environment could
materially harm our business prospects or competitive
position.
The Regulatory Reform Act, signed into law on July 30,
2008, establishes a new regulator for us, FHFA, with enhanced
regulatory authorities relating, among other things, to our
minimum and risk-based capital levels and our business
activities. The Regulatory Reform Act gives our regulator
substantial authority to assess our safety and soundness and to
regulate our portfolio investments, including requiring
reductions in those investments, consistent with our mission and
safe and sound operations. The Act also includes provisions that
increase the regulators authority to change our minimum
and risk-based capital levels and to regulate our business
activities, including new products, management and operations
standards, affordable housing goals, and executive compensation.
The Act expands the circumstances under which we could be placed
into conservatorship and also authorizes FHFA to place us into
receivership under specified circumstances. In addition, the Act
requires us to make certain contributions to affordable housing
funds administered by the Secretary of HUD and the Secretary of
the Treasury. The Act also provides the Secretary of the
Treasury with temporary authority, until December 31, 2009,
to purchase any obligations and other securities we issue under
certain circumstances.
Given the recent enactment of this Act and the fact that FHFA
has considerable discretion in implementing its provisions,
including through rulemaking proceedings and the issuance of
orders, we cannot predict the impacts that the Act and
FHFAs exercise of its authority under the Act will have on
our business, financial position or results of operations.
However, to the extent the Act or regulations or orders issued
by FHFA pursuant to the Act may, for example, increase our
capital requirements, limit our portfolio and new product
activities, increase our affordable housing goals, or limit our
ability
to attract and retain senior executives, we anticipate that the
impact could be materially adverse. See Legislative and
Regulatory Matters for additional information concerning
the provisions of the Regulatory Reform Act and their potential
impact on us.
Our
ability to manage our regulatory capital requirements may be
adversely affected by market conditions, and actions that we may
be required to take to maintain our regulatory capital could
adversely affect stockholders.
Our ability to manage our regulatory capital may be adversely
affected by mortgage and stock market conditions and volatility.
Factors that could adversely affect the adequacy of our capital
for future periods include our ability to execute capital
raising transactions; GAAP net losses; continued declines in
home prices; increases in our credit and interest-rate risk
profiles; adverse changes in interest rates, the yield curve or
implied volatility; adverse OAS changes; impairments of
non-agency mortgage-related securities; downgrades of non-agency
mortgage-related securities (with respect to risk-based
capital); counterparty downgrades; legislative or regulatory
actions that increase capital requirements; or changes in
accounting practices or standards. Adverse market conditions may
limit our ability to raise new core capital, and may affect the
timing, amount, type and mix of securities issued to raise new
core capital.
Under current OFHEO regulations, the regulatory risk based
capital standard in particular is highly sensitive to underlying
drivers, including house price changes (based on OFHEOs
all transaction index); downgrades of non-agency
mortgage-related securities; counterparty downgrades; retained
portfolio growth; the duration, term and optionality of our
funding and hedging instruments; and other factors. While we
have historically met the risk-based capital standard, there is
a significant possibility that continued adverse developments in
relation to one or more of these underlying drivers could cause
us to fail to meet this standard. If we were not to meet the
risk-based capital standard, we would be classified as
undercapitalized by OFHEO. See ITEM 1.
BUSINESS REGULATION AND SUPERVISION
Office of Federal Housing Enterprise Oversight
Capital Standards and Dividend Restrictions and
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 9: REGULATORY
CAPITAL Classification in our Registration
Statement for information regarding potential actions OFHEO may
seek to take in that event. Under the Regulatory Reform Act,
FHFA is charged with developing risk-based capital requirements
by regulation. The nature of the requirements FHFA may
eventually adopt pursuant to this authority is currently
uncertain.
To help manage to our regulatory capital requirements and the
OFHEO-directed mandatory capital surplus, we have announced
that, subject to approval by the board of directors, we
currently expect to reduce the dividend on our common stock in
the third quarter of 2008 from $0.25 to $0.05 or less per share,
and we are considering other measures such as issuing equity in
amounts that could be substantial and materially dilutive to
existing shareholders, reducing or rebalancing risk, limiting
growth or reducing the size of our retained portfolio by
allowing the portfolio to run off and/or by selling securities
classified as trading or carried at fair value under
SFAS 159 or available-for-sale securities that are
accretive to capital (i.e., fair value exceeds amortized
cost), slowing purchases into our credit guarantee portfolio,
issuing additional preferred or convertible preferred stock and
issuing common stock. Our ability to execute any of these
actions or their effectiveness may be limited and we might not
be able to manage to our regulatory capital requirements and the
mandatory target capital surplus. For example, our ability to
issue additional preferred or common stock or other capital
securities will depend, in part, on market conditions, and we
may not be able to raise additional capital when needed.
Issuances of new preferred or common equity may be materially
dilutive to existing stockholders and may carry other terms and
conditions that could adversely affect the value of the common
or preferred stock held by existing stockholders.
If we are not able to manage to the mandatory target capital
surplus, OFHEO may, among other things, seek to require us to
(a) submit a plan for remediation or (b) take other
remedial steps. In addition, OFHEO has discretion to reduce our
capital classification by one level if OFHEO determines that we
are engaging in conduct that could result in a rapid depletion
of core capital or determines that the value of property subject
to mortgage loans we hold or guarantee has decreased
significantly. See ITEM 1. BUSINESS
Regulation and Supervision Office of Federal Housing
Enterprise Oversight Capital Standards and Dividend
Restrictions and ITEM 13. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING
NOTES NOTE 9: REGULATORY CAPITAL
Classification in our audited consolidated financial
statements in our Registration Statement for information
regarding additional potential actions OFHEO may seek to take
against us. See PART I
ITEM 2. MD&A EXECUTIVE
SUMMARY Legislative and Regulatory
Matters Government Sponsored Enterprise, or GSE,
Oversight Legislation for information concerning the
enhanced regulatory authorities FHFA now possesses and
Treasurys temporary authority to provide various types of
support to Freddie Mac should it become necessary. The terms of
any such support, if it were to be made available, are
uncertain, but they could have a material adverse impact on
existing common and preferred stockholders, including
substantially diluting or effectively eliminating existing
stockholders financial interest in Freddie Mac.
While it is difficult to predict how long these conditions will
exist and how our markets or products will ultimately be
affected, these factors could adversely impact our business and
results of operations, as well as our ability to provide
liquidity to the mortgage markets.
Our
financial condition or results of operations may be adversely
affected if mortgage seller/servicers fail to perform their
obligation to repurchase loans sold to us in breach of
representations and warranties.
We require seller/servicers to make certain representations and
warranties regarding the loans they sell to us. If loans are
sold to us in breach of those representations and warranties, we
have the contractual right to require the seller/servicer to
repurchase those loans from us. Our institutional credit risk
exposure to our seller/servicer counterparties includes the risk
that they will not perform their obligation to repurchase loans,
which could adversely affect our financial condition or results
of operations. The risk of such a failure has increased as
deteriorating market conditions have affected the liquidity and
financial condition of some of our largest seller/servicers. See
PART I ITEM 2. MD&A
CREDIT RISKS Institutional Credit Risk
Mortgage Seller/Servicers for additional
information on our institutional credit risk related to our
mortgage seller/servicers.
Mortgage
fraud could result in significant financial losses and harm to
our reputation.
We rely on representations and warranties by seller/servicers
about the characteristics of the single-family mortgage loans we
purchase and securitize and we do not independently verify most
borrower information that is provided to us. This exposes us to
the risk that one or more of the parties involved in a
transaction (the borrower, seller, broker, appraiser, title
agent, lender or servicer) will engage in fraud by
misrepresenting facts about a mortgage loan. We may experience
significant financial losses and reputational damage as a result
of mortgage fraud.
We may
be required to establish a valuation allowance against our
deferred tax assets, which could materially affect our results
of operations and capital position in the future.
As of June 30, 2008, we had approximately
$18.4 billion of net deferred tax assets as reported on our
consolidated balance sheet. The realization of these deferred
tax assets is dependent upon the generation of sufficient future
taxable income. We currently believe that it is more likely than
not that we will generate sufficient taxable income in the
future to utilize these deferred tax assets. However, if future
events differ from current forecasts, a valuation allowance may
need to be established which could have a material adverse
effect on our results of operations and capital position. See
PART I. ITEM 1. FINANCIAL STATEMENTS
NOTE 12: INCOME TAXES for more information on our
deferred tax assets.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Recent
Sales of Unregistered Securities
The securities we issue are exempted securities
under the Securities Act of 1933, as amended. As a result, we do
not file registration statements with the SEC with respect to
offerings of our securities. During the second quarter of 2008,
we did not complete any equity offerings.
We regularly provide stock compensation to our employees and
members of our board of directors. We have three stock-based
compensation plans under which grants may be made: (a) the
Employee Stock Purchase Plan, or ESPP; (b) the 2004 Stock
Compensation Plan, or 2004 Employee Plan; and (c) the 1995
Directors Stock Compensation Plan, as amended and
restated, or Directors Plan. Prior to the stockholder
approval of the 2004 Employee Plan, employee stock-based
compensation was awarded in accordance with the terms of the
1995 Stock Compensation Plan, or 1995 Employee Plan. Although
grants are no longer made under the 1995 Employee Plan, we
currently have awards outstanding under this plan. We
collectively refer to the 2004 Employee Plan and 1995 Employee
Plan as the Employee Plans.
During the three months ended June 30, 2008, no stock
options were granted or exercised under our Employee Plans or
Directors Plan. Under our ESPP, options to purchase
109,091 shares of common stock were exercised and options
to purchase 145,607 shares of common stock were granted
during the three months ended June 30, 2008. Further, for
the three months ended June 30, 2008, under the Employee
Plans and Directors Plan, 178,167 restricted stock units
were granted and restrictions lapsed on 279,285 restricted stock
units. See ITEM 13. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES NOTE 10:
STOCK-BASED COMPENSATION in our Registration Statement for
more information.
See ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 9: REGULATORY
CAPITAL in our Registration Statement for a description of
our regulatory capital requirements and possible regulatory
restrictions on our ability to pay dividends.
Issuer
Purchases of Equity Securities
We did not repurchase any of our common stock during the three
months ended June 30, 2008. Additionally, we do not
currently have any outstanding authorizations to repurchase
common stock.
Information
about Certain Securities Issuances by Freddie Mac
Pursuant to SEC regulations, public companies are required to
disclose certain information when they incur a material direct
financial obligation or become directly or contingently liable
for a material obligation under an off-balance sheet
arrangement. The disclosure must be made in a current report on
Form 8-K
under Item 2.03 or, if the obligation is incurred in
connection with certain types of securities offerings, in
prospectuses for that offering that are filed with the SEC.
Freddie Macs securities offerings are exempted from SEC
registration requirements. As a result, we are not required to
and do not file registration statements or prospectuses with the
SEC with respect to our securities offerings. To comply with the
disclosure requirements of
Form 8-K
relating to the incurrence of material financial obligations, we
report our incurrence of these types of obligations either in
offering circulars (or supplements thereto) that we post on our
website or in a current report on
Form 8-K,
in accordance with a no-action letter we received
from the SEC Staff. In cases where the information is disclosed
in an offering circular posted on our website, the document will
be posted on our website within the same time period that a
prospectus for a non-exempt securities offering would be
required to be filed with the SEC.
The website address for disclosure about our debt securities is
www.freddiemac.com/debt. From this address, investors can access
the offering circular and related supplements for debt
securities offerings under Freddie Macs global debt
facility, including pricing supplements for individual issuances
of debt securities.
Disclosure about our off-balance sheet obligations pursuant to
some of the mortgage-related securities we issue can be found at
www.freddiemac.com/mbs. From this address, investors can access
information and documents about our mortgage-related securities,
including offering circulars and related offering circular
supplements.
We are providing our website addresses and the website address
of the SEC solely for your information. Information appearing on
our website or on the SECs website is not incorporated
into this
Form 10-Q.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote by stockholders
at our annual meeting held on June 6, 2008:
(a) election of 11 members to our board of directors,
each for a term ending on the date of our next annual meeting of
stockholders; (b) ratification of the appointment of
PricewaterhouseCoopers LLP as our independent auditors for 2008;
and (c) approval of the amendment and restatement of the
2004 Stock Compensation Plan.
As shown in Table 53 below, the following persons were
elected to our board of directors at the meeting by the
respective votes indicated:
Table
53 Election of Directors
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|
|
|
|
|
|
|
|
|
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Votes For
|
|
|
Votes Withheld
|
|
|
Barbara T. Alexander
|
|
|
404,199,346
|
|
|
|
95,281,646
|
|
Geoffrey T. Boisi
|
|
|
369,819,080
|
|
|
|
129,661,912
|
|
Michelle Engler
|
|
|
404,219,805
|
|
|
|
95,261,187
|
|
Robert R. Glauber
|
|
|
468,530,914
|
|
|
|
30,950,078
|
|
Richard Karl Goeltz
|
|
|
468,305,883
|
|
|
|
31,175,109
|
|
Thomas S. Johnson
|
|
|
388,395,993
|
|
|
|
111,084,999
|
|
Jerome P. Kenny
|
|
|
489,457,021
|
|
|
|
10,023,971
|
|
William M. Lewis, Jr.
|
|
|
489,857,037
|
|
|
|
9,623,955
|
|
Nicolas P. Retsinas
|
|
|
489,854,972
|
|
|
|
9,626,020
|
|
Stephen A. Ross
|
|
|
448,500,428
|
|
|
|
50,980,564
|
|
Richard F. Syron
|
|
|
487,536,360
|
|
|
|
11,944,632
|
|
The appointment by the Audit Committee of PricewaterhouseCoopers
LLP was ratified at the meeting by the following votes:
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Abstentions
|
|
491,572,741
|
|
3,036,691
|
|
4,871,560
|
The amendment and restatement of the 2004 Stock Compensation
Plan was approved at the meeting by the following votes:
|
|
|
|
|
|
|
Votes For
|
|
Votes Against
|
|
Abstentions
|
|
Broker Non-Votes
|
|
410,464,822
|
|
49,324,696
|
|
5,059,575
|
|
34,631,899
|
ITEM 6.
EXHIBITS
The exhibits are listed in the Exhibit Index at the end of this
Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Federal Home Loan Mortgage Corporation
Richard F. Syron
Chairman and Chief Executive Officer
Date: August 6, 2008
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By:
|
/s/ ANTHONY
S. PISZEL
|
Anthony S. Piszel
Executive Vice President and Chief Financial Officer
Date: August 6, 2008
EXHIBIT
INDEX
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|
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Exhibit No.
|
|
Description
|
|
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3
|
.1
|
|
|
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12
|
.1
|
|
|
|
12
|
.2
|
|
|
|
31
|
.1
|
|
|
|
31
|
.2
|
|
|
|
32
|
.1
|
|
|
|
32
|
.2
|
|
|